I talk to a lot of traders during the course of a week and one of the most frequent concerns expressed is the need for income.
People are buying almost anything these days as long as it provided the income they desperately need. This is especially true of investors who are retired or nearing retirement and need cash flow from their investment portfolio. I see people doing some crazy stuff: buying into non-trader REITs, complex Master Limited Partnerships and large-cap REITs that have doubled in the past few years. Yield-chasing is a recipe for losing a bunch of money (and it always has been), but the Fed’s current zero interest rate policy has investors buying almost anything that throws off cash.
My suggestion would be to slow down and apply the common sense principles of value investing to provide your income needs. Instead of selecting investments on income needs, let’s narrow the world down to cheap stocks and then select those with the best yields. We can adjust our basic principles a little bit and come up with a portfolio of reasonably cheap safe stocks with solid dividend yields.
Bank stocks are a great starting point. I am a huge fan of these stocks, and think that community and regional banks offer tremendous upside over the next five to 10 years. Many of them also have respectable dividend yields and should be able to increase their payouts rapidly as credit conditions continue to improve. As long as we don’t pay a huge premium to book value, it should be easy to find a few banks with big dividends, a margin of safety and decent appreciation potential.
Univest Corporation of Pennsylvania (UVSP) fits the bill for income investors with a yield of 4%. The bank serves Bucks, Montgomery, Chester, and Lehigh counties of Pennsylvania through 32 banking offices. It also provides banking and trust services to the residents and employees of 12 retirement communities. The bank has a solid loan portfolio: Nonperforming assets are just 1.2 % of total assets, and the amount of problem loans has been declining steadily for two years now.
The loan portfolio is heavily tilted towards commercial and industrial loans as well as commercial real estate loans so they are not as subject to stops and starts. They have adequate capital, with equity to assets ratio of a little more than 12, and the stock is not unreasonably priced — trading at just 1.17% of book value. The stock is reasonably cheap and appears to be safe.
All stocks are going to fluctuate in price, and a portfolio of dividend-paying bank stocks like Univest is no exception. Over time, they should provide you a nice income stream that grows every year as earnings improve. So sit back, enjoy the profits and don’t sweat any day-to-day price changes.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.