With global economic data of late either confirming slower growth ahead or suggesting the growth ahead is even more plodding than many thought just a few months ago, many investors are doing a number of things in response. Those actions include revisiting existing short positions and assessing the impact of slowing growth forecasts on company revenues and earnings. While I have done the former and am working through the latter, another option exists. That option is the one that I am pursuing these days as I look for well-positioned companies that have favorable, if not compelling, dividend yields.
Aside from providing dividend income, dividend yields are another way to value a company’s stock as we compare current dividend yields to previous peaks and lows during the last several years. We can do this with price/earnings (P/E) ratios and other ratios, such as enterprise value (EV) to earnings before interest, depreciation and amortization (EBITDA) or EV to revenue. As with all of those metrics, another way to evaluate them is through peer analysis. In this method, we compare a company’s financial performance metrics to those of its competitors. When it comes to valuation metrics and assessing the value of a stock, the key word to me is triangulation. The main reason is that I prefer to arrive at a price target using three valuation methodologies — some analysts use less but three gives me a high degree of comfort.
There is no shortage of companies in the S&P 500 that are dividend payers. But with the S&P 500 having a dividend yield near 2.5% and savings rates near 1.5%, investors need to look for more favorable returns. Luckily, there are a number of companies that have dividend yields well above the S&P 500. But that high payout also could be a red flag on a business that is under pressure. A case in point is RadioShack (RSH), which offers a dividend yield of more than 11% but its earnings have been under pressure for the last several quarters. At the other end of the spectrum, we have Applied Materials (AMAT), which I recently discussed as one to watch — given what could be a firming semiconductor capital equipment backlog. AMAT shares offer a dividend yield of 3.5% and the underlying business is a growing, cyclical one that is poised to benefit from the expanding digital lifestyle that drives demand for devices and the chips that power them.
Another avenue to explore in search of favorable dividend yields is real estate investment trusts (REITs), which is a tax designation that reduces corporate tax for a corporate entity investing in real estate. In return, REITs are required to distribute 90% of their taxable income into the hands of investors. That tends to result in favorable dividend yields. But that yield can be volatile, since the underlying dividend payment reflects a REIT’s taxable income in any given year. As such, a REIT can have large payouts in profitable years, but smaller payouts or even periods of no dividends in times of losses. With easily more than 200 publicly traded REITs, there are a variety of investment strategies to be had in terms of the underlying real estate. Some of the more common REITs include apartments, retail centers, and hotels. Dividend yields on those types of REITS range from a low of 4.3% to a high of just above 12%.
As I said, there is no shortage of REITs to choose from, but subscribers to PowerTrend Profits, will be able to take advantage of those REITS that are benefitting from the shifts in economics, demographics, psychographics and more that impacts consumer behavior, and forces companies to make fundamental changes to their businesses that are at the heart of my PowerTrends. In the upcoming July issue of PowerTrend Profits I’ll be delving into those dividend yield-rich REIT companies that intersect with my PowerTrends, as well as dishing about the latest on new and existing PowerTrend stock picks.
I will offer more analysis as conditions develop.
Editor, PowerTrend Brief
P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, August 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, by going to ChrisVersace.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027877.
Next week will be a slow one as we head into the summer months — with a modest number of corporate earnings and only a handful of economic data repots scheduled for release. Consumer prices should drift lower following the decline in gas prices, which now stand near $3.56 per gallon on average, according to AAA, compared to the recent peak of $3.93 per gallon. With an eroding manufacturing economy in Europe, one indicator to watch next week, in terms of seeing how our domestic manufacturing is holding up, is Industrial Production. Year to date that index has been choppy and not offered any clear direction on the domestic manufacturing economy. I hope it will prove more insightful on Friday when we get the May reading.
Monday, June 11
ePlus Inc. (PLUS)
Finisar Corp. (FNSR)
Majesco Entertainment (COOL)
Tuesday, June 12
Treasury Budget (May)
Michael Kors Holdings (KORS)
Wednesday, June 13
MBA Mortgage Index (Weekly)
Retail Sales (May)
Producer Price Indices (May)
Business Inventories (April)
Luby’s Inc. (LUB)
Thursday, June 14
Initial & Continuing Jobless Claims (Weekly)
Consumer Price Indices (May)
Kroger Co. (KR)
Pier 1 Imports Inc. (PIR)
Smithfield Foods Inc. (SFD)
Friday, June 15
Empire Manufacturing Index (June)
Industrial Production (May)
Capacity Utilization (May)
Michigan Sentiment Index (June)