by Dan Burrows | April 4, 2014 11:23 am
A low share price isn’t always a sign of weakness in cheap stocks. Sometimes, it’s actually a gift — doubly so when you’re talking about low-priced dividend stocks.
In some cases, cheap stocks merely priced in the single-digit-dollar range when they went public. Other times, cheap stocks might have sold off to a point where there’s too much value — and too much chance of a turnaround — to ignore.
In any case, cheap stocks can have big upside, and they’re certainly easy to buy in bulk. After all, at $540 a share, how much Apple (AAPL) stock can you load up on?
Like small-cap stocks, cheap stocks often get less interest from analysts, the media and Wall Street. That increases the odds that these cheap stocks are mispriced in your favor.
There’s an even stronger case to made for cheap stocks that pay competitive dividends. Not only do they possess the attributes cited above, but they offer a steady stream of better-than-average income at a time when yields is awfully hard to come by.
With that in mind, here are five of the best cheap dividend stocks you can buy — four of which trade for less than $10, and one that’s just some pocket change more.
Share Price as of 4/4: $9.11
YTD Stock Performance: 4%
Dividend Yield: 2.2%
Among cheap stocks, Wendy’s (WEN) doesn’t have an amazing dividend yield. It’s 2.2%, which is merely OK.
What WEN stock does have going for it is more upside to come.
After years of struggling, Wendy’s finally went all-in on a new model. It’s selling company-owned restaurants and transforming itself into an operator of franchises. The franchise model means more earnings, more return on equity, more revenue from rents and royalties, and more free cash. (Owning restaurants is capital-intensive.)
Wendy’s most recent quarterly results were mixed. Earnings of 11 cents a share beat the Wall Street estimate by 2 cents, but revenue came up short. The good news is that early returns from the transformation program appear to be working as Wendy’s reins in costs, and that should soon benefit WEN stock.
Additionally, Wendy’s can use some of the cash freed up by the franchise model to invest in advertising and marketing, and that should boost customer traffic.
Share Price as of 4/4: $9.14
YTD Stock Performance: 14%
Dividend Yield: 4.4%
Sometimes cheap stocks are cheap because they’ve had a rough ride — and some of them are buys when the tough times look like they’re over. STMicroelectronics (STM) has struggled in the semiconductor industry (who hasn’t?), but its prospects are looking up.
STM and Ericsson (ERIC) split up their ill-advised partnership last summer. That will help STM’s cash flow and bottom line because the partnership with Ericsson bled red ink.
As for strategic positioning, STM is an enviable place. Major customers include Apple, General Electric (GE) and and Siemens (SI). It’s also moving into or already a leader in some hot new markets.
STM is No. 1 when it comes to wearable technology such as smartwatches, and it’s on the cutting edge in nanotechnology. It’s also the third-largest supplier to the automotive industry, which is seeing its own resurgence in growth.
This is also a dividend stock you can count on. Even when earnings were volatile during the Ericsson partnership, STM still maintained its payout level. STM boasts a dividend yield north of 4%, though it hasn’t improved upon its nominal payout since 2011.
Share Price as of 4/4: $10.67
YTD Stock Performance: 1%
Dividend Yield: 5.5%
Inland Real Estate (IRC) is a real estate investment trust, which means it’s required to pay out 90% of its earnings as dividends in return for certain tax breaks. (That’s why REITs carry such high dividend yields.)
Specifically, IRC specializes in retail locations. Some of its biggest customers are national chains like Walmart (WMT) and CVS (CVS).
Also, IRC is the only name in this group of dividend stocks that’s above $10 as of this writing … but I wouldn’t hold that against Inland.
As InvestorPlace editor Jeff Reeves said at the beginning of 2014, IRC’s big-name tenants translate into rock-solid stability and the company thus boasts a 95% occupancy rate. That bodes well for the income part of this equity-income name.
IRC stock is barely above breakeven for the year-to-date, but at least it has fairly low volatility. With a beta 0f 0.85, it’s significantly less volatile than the broader market. Throw in the healthy 5.5% yield on the dividend — which is paid monthly — and you can sleep well at night with IRC stock.
It also pays to be a little patient with Inland while waiting for price appreciation. Like the broader market, IRC stock was bound to cool off after such a strong run in 2013.
Share Price as of 4/4: $9.93
YTD Stock Performance: 9%
Dividend Yield: 6.4%
It’s not often you find cheap stocks with market caps of $112 billion, but Spanish bank Banco Santander (SAN) still is recovering from the recession that swept over Europe.
Happily, although growth in Spain and elsewhere is slow, economic activity is picking up and the worst appears to be behind the continent — part of why Bryan Perry picked SAN stock as his entry in InvestorPlace’s 10 Best Stocks of 2014 contest, where it’s currently sitting at No. 3.
There’s even talk of another smaller stimulus program from the European Central Bank to goose things along. SAN also has a large presence in Latin America, where with a few exceptions economic activity is robust.
Meanwhile, sentiment on this giant among cheap stocks has definitely picked up. The U.S. arm of Banco Santander had its capital plan rejected by the Federal Reserve and yet shares have only gone up. (To its credit, the market didn’t overreact to the news, which only means payments to its foreign parent will be restricted to year-ago levels.)
SAN stock also has some nice momentum early in the second quarter, breaking above both its 50- and 200-day moving averages.
Share Price as of 4/4: $7.78
YTD Stock Performance: 10%
Dividend Yield: 10.4%
MFA Financial (MFA) is another REIT, but in this case, it doesn’t own any actual property — only the paper behind it, investing in mortgage-backed securities ultimately secured by single-family residences.
Stocks playing in some of the same type of assets that were a key to the housing bubble might scream “danger,” but MFA isn’t unmindful of the risks. More than half of its portfolio is guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. It also holds about a third of its portfolio in fixed-rate mortgage-backed securities. Along with a decent housing market, that helps mitigate risk.
As long as the housing market continues to improve, there should be upside for MFA stock, as well as its dividend.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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