3 Ideal Dividend Stocks You Can Buy
Recently, I wrote an article explaining why I like to own dividend-paying stocks even though I don’t need the income. In paying a dividend, a company sacrifices some of its potential to reinvest its profits in order to grow its business. It also signals to shareholders that management is confident in the company’s ability to generate sustainable profits even in a rough economic environment.
Furthermore, there is intrinsic demand for dividend-paying stocks from investors who need the income — if a company’s dividend yield becomes attractive enough, this might incentivize a retiree to buy its stock, even if the business doesn’t have a lot of growth potential. This is the case, for instance, with tobacco stocks, which pay very high dividends relative to the rest of the market, but which don’t have the incredible growth opportunities that we find in, for instance, e-commerce.
With that being said, I think all investors should include a few dividend-paying stocks in their portfolios. When I say “dividend-paying stock” I don’t simply mean any stock that pays a dividend. Lots of companies pay small token dividends that really don’t matter. Visa (NYSE:V) — a growth company that I really like — pays a dividend of $1.60 per share annually versus its $203 per share price tag.
This is not going to generate interest from retirees who need dividend income. A dividend-paying stock for my purposes here refers to a company that is paying out a large percentage of its profits in dividends. It also has a dividend yield that is substantially higher than that of the S&P 500, which yields a paltry 1.9 percent.
In what follows, I describe three dividend-paying stocks that I think are fairly attractive.While they won’t make you rich, they will provide steady returns. They should also hold up better than most other stocks in a bear market.
1. Philip Morris International (NYSE:PM)
Philip Morris International sells tobacco products outside the United States. It currently trades at 15.8 times trailing earnings and it pays a dividend of just over 4.5 percent. The company has raised its dividend every single year since going public in 2008. Philip Morris alone isn’t going to make you rich, but it is arguably the best tobacco company to own. Tobacco companies are very stable earners. They are seeing fewer customers, but those customers are extremely loyal, and it is very difficult for them to quit using tobacco.
While tobacco is a business with a diminishing customer base, there are several countries overseas in which this is not the case. Since Philip Morris has the top brand name in the industry — Marlboro — it is extremely well positioned to take advantage of growth in developing economies such as Indonesia, where tobacco use is growing.
The company also has extremely strong pricing power, and it is not shy about raising its prices. This has kept revenues strong despite a strong dollar.
Given that the company has some opportunity to grow, but not much, I think that the best approach to owning this stock is to buy it when the dividend yield is high, near 5 percent, and to sell it when the dividend yield shrinks to, say, 3.8 percent.
2. Alliance Resource Partners LP (NASDAQ:ARLP)
Alliance Resource Partners is an extremely attractive coal producing company, and it is ideal for dividend investors. It currently pays more than a 5.5 percent dividend yield, and it trades at just 11.7 times earnings. This means that the dividend has room to grow. Long-term shareholders of the company know that dividend growth is a priority for this company: Management hikes the dividend on a quarterly basis.
While coal miners have been struggling due to stricter U.S. Environmental Protection Agency regulations on coal burning, you would fail to realize this looking simply at Alliance Resource Partner’s share price. The stock is within striking distance of hitting an all-time high. It is also up an incredible 320 percent over the past 10 years, and that doesn’t count dividend payments. The key to the company’s success has been low and stable production costs. While the company did see its profits decline, it maintained its resilience in its ability to generate cash flow and to return capital to shareholders.
Investors looking to take a position should wait for a pullback. The stock is very illiquid, and this means that it has a propensity to drop substantially when the overall stock market is weak. Thus, my strategy would be to buy a little now, as it is undervalued, but to also place a buy order below the market price. If your order doesn’t get filled, then it’s not a big deal. If it does get filled, then you will be getting ownership in an excellent company at a low valuation.
3. Hercules Technology Growth Capital (NYSE:HTGC)
Hercules Technology Growth Capital is a smaller and riskier company than the first two, but I think it has an intriguing business model, and it offers a unique appeal which I will get to in a moment. The company is a business development corporation (aka a BDC), meaning it provides capital, usually in the form of secured loans, to small upcoming technology companies. In essence, Hercules is a high-yield bond fund. However, often when the company lends money to a small technology company, it will get warrants in addition to bonds.
This means that the company gets the right to buy shares in the company it lends money to at an agreed-upon price. This price is usually significantly higher than the market or the estimated valuation (many of these companies aren’t yet publicly traded). So for instance, if a company’s stock is worth $2 per share, Hercules might lend it $25 million at 10 percent per year, and it might also get 1 million warrants, entitling it to buy 1 million shares of stock at, say, $4 per share by 2017. Thus, Hercules is a winner if the company does extremely well, or even if it only does moderately well. Of course, if the company fails, so do the bonds, and Hercules loses out.
The appeal of Hercules is that it offers retail investors and investors who aren’t that familiar with technology investing a way to get exposure to small technology companies that can make it big.
Right now, the company trades at a very low valuation of just 8.6 times earnings, and it pays a dividend of nearly 9 percent. While this is very attractive, keep in mind that the company is this cheap for a reason — it invests in high-risk companies that are very small. They often need capital to do research in order to determine the viability of their products.
If this research fails, so can the company. But Hercules has a proven track record of investing in companies that have been successful. It has even been a part of several IPOs, and these have given it the opportunity to cash out of its more valuable warrants and to reinvest its capital. Investors who want exposure to small high risk/high reward technology companies but who don’t want to take the risk of buying these companies individually should consider taking a position in Hercules shares.
Disclosure: Ben Kramer-Miller is long Alliance Resource Partners LP.