“Price is what you pay. Value is what you get”
“Price” and “value” are often two very different things. Though a single share cost more than $200,000, Buffett’s Berkshire Hathaway is considered a value stock by many. Yet Twitter, which trades hands for just $35 per share, is often called a bubble stock.
Yet low-priced stocks are a hunting ground for some very smart, very successful investors. Joel Tillinghast, manager of the Fidelity Low-Priced Stock Fund, is one of the most successful fund managers of his generation, and he invest almost exclusively in stocks trading for less than $50 per share.
InvestorPlace Editor Hilary Kramer, author of Big Profits from Small Stocks takes it a step further, focusing on stocks trading for less than $10 per share.
As Kramer points out, most “big money” institutional investors are prohibited from buying stocks priced at less than $10. And even if they have the ability, few have the intestinal fortitude. Their own research departments generally won’t cover the stocks, and it’s a career risk to buy a stock that is too far out of the mainstream.
But the rationale for buying a stock with a single-digit price tag is straightforward. Due to the mechanics of the market, it’s generally a lot easier for a $5 stock to go to $10 than for a $50 to go to $100. Yes, the percentages are the same. But lower-priced stocks are often low-capitalization stocks as well. A large investor moving into a small cap stock is going to move the price a lot more that he would in a large, liquid stock with an enormous float. The key is finding these gems before the big boys do.
Today, we’re going to take a look at seven cheap dividend stocks trading for under $10. All have a few bumps and bruises on them; you simply don’t get this kind of pricing otherwise. But all are also solid dividend payers worth a good, hard look.
With Greece likely to default and send shockwaves through the Eurozone, a European bank might seem like an odd choice of investment. Yet Banco Santander, S.A. (ADR) (NYSE:SAN) is one of biggest, best managed and most globally diversified banks in the world.
Its US-traded ADR also happens to sell for just $7.26 per share.
At current prices and exchange rates, Santander’s €0.40 expected 2015 dividend works out to a yield of about 6.3%.
Santander cut its dividend earlier this year, as incoming Executive Chairman Ana Botín make boosting the bank’s capital cushion a top priority. That diluted existing shareholders—which is part of the reason the shares trade at the bargain prices they do today—but it also made Santander a safer, more conservative bank going forward.
An unruly default in Greece will probably rattle Santander’s stock. If it does, use the volatility as an opportunity to load up on a cheap stock with a fantastic dividend.
And here’s one more thing worth mentioning. Legendary contrarian value investor David Dreman has recently become a strong buyer. Dreman initially purchased Santander in 2010 and has grown his share count from 111,820 shares to 631,135 as of last quarter.
There’s a reason for that. At current prices, around $7.70, I consider it one of the best bargain stocks in America today. The stock trades at a 25% discount to book value… a book value that was just reaffirmed this past quarter. To put that in perspective, its peers in the BDC sector trade at an average discount to book value of just 6%. The last time Prospect Capital was this cheap, it returned 60% in capital gains and dividends over the following 12 months. Even if we got only half that return this time around, that would be a fantastic return we’re not likely to find too many places in today’s overpriced stock market.
Prospect Capital’s dividend, which is paid monthly, works out to a 13% dividend yield at today’s prices. And I expect the dividend to be safe for at least the next 9-12 months. Prospect Capital cut its divided last year as part of a larger strategy to de-risk the company. While the dividend cut was not popular with investors — and is a big reason why the stock trades at the discount it does today — it was the only sensible move. Management wanted to avoid reaching for yield, risking defaults and ultimately putting the company at risk.
The good news is that, with the dividend cut out of the way, investors can feel a lot more comfortable with today’s very attractive payout.
American Realty Capital Properties
It may be a little controversial to include American Realty Capital Properties Inc (NASDAQ:ARCP) on this list. ARCP temporarily suspended its dividend late last year as it dealt with the fallout from its accounting snafu. (For a review of ARCP’s accounting saga see “Accounting Irregularities knock down ARCP: Buying Opportunity or Enron Part II?“)
ARCP’s management has been somewhat vague about when the dividend will be reinstated, though most analysts that follow the stock expect it by later this year.
While they are waiting, investors can buy an inexpensive REIT loaded up with high-quality retail properties trading for just $8.66 per share.
Accounting scandals are an ugly affair and bring to mind the unfortunate Enron affair. But after its travails and subsequent audits, ARCP may very well now have the cleanest and most conservative accounting books in America. But because investors are still wary of the stock, we can get it at a fantastic price. Shares of ARCP trade for just 86% of book value. To put that in perspective, Realty Income — considered by most analysts to be the blue chip in the triple-net retail REIT sector — trades for 202% of book value.
It might be a while before investors award ARCP a similar valuation. But buying at today’s prices, we have a wide margin of safety. And once the dividend is reinstated, I would expect a dividend yield somewhere in the ballpark of 5%-7% based on today’s prices and perhaps even higher.
Lexington Realty Trust
Up next is another REIT that has taken its knocks, Lexington Realty Trust (NYSE:LXP). Lexington trades for just $9.34 per share and sports a 7.6% dividend yield.
As with the rest of the REIT sector, 2015 has not been kind to Lexington. As recently as January, it was trading for $11.69 per share. Fears of Fed tightening have taken a wrecking ball to bond prices and to the prices of “bond like” investments like high-yielding REITs. So the sell-off in Lexington shares has relatively little to do with the REIT itself and a lot to do with macro concerns about interest rates.
But even so, Lexington is cheap relative to its peers. According to REIT guru Brad Thomas, Lexington has one of the lowest price/FFO multiples in the REIT universe at just 8.9. To put that in perspective blue-chip Realty Income trades at a price/FFO multiple of 17.6.
Lexington is a riskier REIT than Realty Income and should trade at a modest discount. But the discount we see today is anything but modest. At today’s prices, Lexington would seem too good to pass up.
Fortress Investment Group
Going a very different direction, we come to private equity manager Fortress Investment Group LLC (NYSE:FIG). Despite the size of its business — Fortress has $70 billion under management scattered across various funds and strategies — Fortress trades for just $7.71 per shares and yields a respectable 4.2% in dividends.
Fortress is best known as a private equity manager, and the firm’s biggest investments in this space are in transportation, infrastructure, financial services and senior living. But private equity only accounts for for about $15 billion of Fortress’s total assets under management. Fortress also manages about $14 billion in distressed debt funds and about $8 billion in aggressive hedge fund strategies. But the bulk of Fortress’s business — at $33 billion in assets — comes from good, old-fashioned plain-vanilla bond portfolios.
Fortress’s stock price has struggled over the past two years and has been choppy and volatile since coming out of the 2008 meltdown. But Fortress has beaten the pants off the S&P since the beginning of 2009, generating returns of 244% to the S&P 500’s 138%. And those figures don’t include Fortress’s higher dividend.
Fortress, like the rest of the financial sector, might have a hard time navigating the Fed’s coming tightening cycle. Only time will tell. But at $7.71, the shares might be worth a stab.
Next up is Canada-based utility TransAlta Corporation (USA) (NYSE:TAC), a non-regulated power generation company with operations in the United States, Canada and Australia.
TransAlta owns and operates hydroelectric, wind, natural gas and coal-fired facilities. It also actively trades electricity and other energy-related commodities and derivatives.
TransAlta has had a rough run. As recently as two years ago, shares traded hands for more than $14 per share. Today, shares fetch just $7.99.
TransAlta’s dividend will appear wildly variable to American investors. That’s because, as a Canadian company, it declares its dividends in Canadian dollars. TransAlta’s dividend has been set at 18 Canadian cents per quarter since April 2014. At current exchange rates, that works out to 14.6 U.S. cents for a dividend yield of 7.3%.
That’s not too shabby. Though be warned, TransAlta aggressively cut its dividend in 2014 from 29 Canadian cents per quarter.
And finally, we get to Brazilian chemical producer Braskem SA (ADR) (NYSE:BAK). You can roughly think of Braskem as the Brazilian equivalent of Dow Chemical, though it specializes specifically in petrochemicals. And speaking of “petro,” Braskem is an affiliated company of Brazilian oil major Petrobras, which partially explains why the share price has plunged to the depths that its has. Petrobras was embroiled in a corruption scandal last year that still threatens to bring down the presidency of Dilma Rousseff.
At time of writing, Braskem traded for $8.58 after trading as high as $15.59 last November. The dividend yield is a respectable 4.4%.
Your biggest concern with Braskem is Brazil’s macro stability. The Brazilian economy is slowing, even while inflation is on the rise. It’s the modern-day version of 1970s stagflation, and it isn’t pretty.
All the same, Brazilian stocks are cheap, and strength in the Brazilian real due to central bank tightening should be good for holders of the American ADRs. Consider Braskem a high risk but potentially very high return play on a Brazilian return to macro stability.
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