Investors in need of reliable income are finding it increasingly difficult to find income stocks that offer decent dividends at a good price. Yield-chasing by individuals and institutions alike has distorted the price of many dividend-paying and interest-bearing securities in the past two years, and the search for reasonable opportunities seems to get more difficult by the day.
I sat down this morning and ran some screens using some of the criteria laid out by Ben Graham in The Intelligent Investor. Specifically I looked for income stocks that pay a decent dividend yield, trade at a reasonable price-to-book-value and have a solid balance sheet with plenty of cash on hand to pay the bills. I added a criteria of dividend growth potential, as the key component for income investors right now is buying a stream of cash flows that grow along with their needs year by year.
I found a handful of stocks that make a lot of sense from an income and value perspective for long-term investors.
Corning (GLW) was one of my favorite stocks last year. Shares of the glass company have moved up a bit and are no longer the asset value that they were, but they still trade at only a small premium to book value. The company’s products are used in smartphones, tablet computers, emission control devices and lab equipment, among a host of other uses in faster growing segments of the economy. The balance sheet is rock-solid, with $5.4 billion of cash and just $2.3 billion of low-cost debt. Technology sales should drive growth at Corning as products like Gorilla Glass are now considered an essential part of most smartphones and tablets. The stock yields 2.71% right now, and the company should be able to grow the dividend by better than 15% annually for the foreseeable future. This stock should be in just about all income portfolios, in my opinion.
Comtech Telecommunications (CMTL) is another company with a solid dividend whose shares trade at a decent price. The company makes advanced telecommunication products and sells to a wide range of users, including satellite systems integrators, wireless providers, broadcasters and defense contractors — as well as the U.S. government. The company has seen some weakness as military and government orders have slowed and the marketplace remains very competitive, but the long-term outlook is pretty strong. The company has been actively buying back stock and has spent almost $25 million in purchases in the past nine months. Comtech has more than enough cash on hand and very little debt, so the balance sheet is solid and the stock yields 4.5% right now. The company should be able to increase the dividend at a double-digit pace for the next several years at least.
Yield-oriented investors need to be very price-conscious and buy dividends at a reasonable price, and focus on companies with the potential for steadily rising payouts. These two income stocks can get you started on a portfolio of dividend growth at a good price.
At the time of publication, Melvin was long GLW.