3 Quality Stocks for Value and Dividend Investors
With stocks trading near all-time highs, it is becoming more difficult to find good values. People feel that they are forced to buy stocks because interest rates are so low, and so while stocks appear expensive, they are also a superior alternative to bonds, which are at historically high levels, as well as cash, which yields virtually nothing.
But even if you feel that you need to own stocks, you don’t necessarily have to buy overvalued stocks. There are plenty of value opportunities for investors who look under the radar, and I list three here. Averaged together, these three stocks trade at about half the price-to-earnings multiple of the S&P 500, and they also yield about three times as much, making them especially appealing for value investors. Furthermore, I think they are quality companies: they aren’t cheap because of some problem with the firm.
1. Hercules Technology Growth Capital (NYSE:HTGC)
Hercules Technology is what is referred to as a business development corporation, or a BDC. A BDC provides startup capital to small companies in exchange for interest payments and some stock warrants, or the right to buy a certain amount of the company’s stock at an agreed-upon price.
There are lots of BDCs, but Hercules Technology is my favorite because it gives investors exposure to the exciting high-tech world while trading at just 10 times earnings with a 7.5 percent dividend yield. It also gives investors access to management’s expertise, which is important because it is difficult for individual retail investors to pick small tech companies given that doing so intelligently requires highly specialized knowledge.
While Hercules won’t make you a fortune overnight, it will give you exposure to some excellent companies that aren’t yet publicly traded, and leverage to the upside if they succeed. The company has made a few bad bets that have gotten blown out of proportion, but otherwise it has an excellent track record.
2. AT&T (NYSE:T)
AT&T is not really an under-the-radar stock, but it is one that investors should consider. The shares trade at just 10 times earnings and yield over 5 percent, which makes it the cheapest stock in the Dow Jones Industrial Average. The company has been plagued by slow growth and competition, but it has recognized its shortcomings and has taken initiatives to drive growth and increase shareholder returns.
For instance, it is improving its servers that have been heavily criticized by consumers and analysts. While this will be expensive, it will be worthwhile for long-term investors. Meanwhile, the company generates a lot of cash flow and it pays you to wait. Given the deep value in AT&T shares, I think that we can start to see them outperform, especially if the market corrects as investors look for value and safety.
3. Alliance Resource Partners (NASDAQ:ARLP)
Alliance Resource Partners has bucked the downtrend in coal. While many coal companies have seen enormous losses, cut their dividends, and have seen their stock prices fall by 80 percent or more, Alliance Resource Partners is trading near an all-time high and pays a 5.4 percent dividend.
The reason for this is that the company has extremely low costs, and it has contracts in place with utility companies that aren’t heavily impacted by the new anti-coal EPA regulations. Thus, the company has continued to generate cash flow, grow its profits, and pay a sizable dividend, which management increases on a quarterly basis. If you want to make a timed contrarian bet on coal, then look elsewhere for more upside.
But if you believe that the coal market will be around for years to come — and even with all of these anti-coal regulations, 70 percent of Americans’ electricity comes from coal – and if you don’t want to time the market, then you want quality and income, which is what you get with Alliance Resource Partners.
Disclosure : Ben Kramer-Miller is long Alliance Resource Partners.