3 Dividend Plays for a Fair Price

by Marc Bastow | July 25, 2012 6:30 am

Seriously, what’s an investor to do?

The news out of Europe changes every day — except it apparently only changes from bad to worse[1].

That same news keeps hampering markets here at home, where we still have our own debt problems. Plus, earnings season is upon us, and while there is some good news out there, there’s plenty of bad. Several companies already have lowered guidance[2], and many companies with their feet in international waters are getting killed by a stout dollar[3].

And, of course, yields on your favorite CDs or money funds are virtually negative, since even today’s meager inflation rates still top those interest rates.

The flight to safety, if not yield, continues unabated, evidenced by record-low yields on U.S. Treasury securities[4] of all terms, including a 1.3% yield on the 10-year bond.

So forget bonds — even after a run-up in higher-yielding stocks and other instruments, there’s still a few companies out on the market that offer a solid dividend yield for a fair price. Here are three such dividend players that might fit the bill:

Lowe’s (2.5% Yield)

Whether they’re trying to improve the house they have to stick with, or prepping a home on optimism of a rebounding housing market[5], more Americans are thinking about renovations — which means home-improvement retailer Lowe’s (NYSE:LOW[6]) is on the top of their minds.

One of the most impressive facets of Lowe’s management is that they aren’t afraid to make changes to maximize the company agenda. While Lowe’s opened 25 new stores in fiscal year 2012, reaching more than 1,700 total, they also closed 27 underperforming stores throughout the country — a nod to efficiency and shareholder value.

Lowe’s just went past the $50 billion mark in revenues for the fiscal year ended February 2012, and although earnings were down slightly against 2011 figures, they still are right up against the $2 billion numbers put up before.

Cash flows are similarly steady at just over $3 billion per year, plenty of money to keep up with capital expenditures and its 16-cent quarterly dividend, good for a nice 2.5% yield. Lowe’s trades at just under 17 times trailing earnings — and looking forward, it’s even better, at less than 12 times forward earnings. As a bonus, even the per-share ticker price of $25 won’t take your wallet to the woodshed.

United Technologies (3% Yield)

If it flies through the air, there’s a good chance that United Technologies (NYSE:UTX[7]) helped to build it.

UTX has been in the building systems and aerospace industries since Elisha Otis revolutionized the elevator in 1853. That’s right, UTX includes Otis Elevator, along with other iconic brand names like Pratt & Whitney, Carrier and Sikorsky.

United Technologies is indeed a highly diversified company. With nearly 200,000 employees and and $58 billion in sales, UTX literally spans the globe, operating in 180 countries out of 4,000 offices and facilities.

UTX has shown steady growth during the past three years, with its most recent profits coming in around $5 billion. And its cash flow of $6.6 billion should keep the dividend drumbeat going. The company has paid a dividend since 1980, and currently yields about 3%. And investors only need to pay about 15 times trailing earnings and about 11 times forward earnings, which sounds like a smooth enough ride to me.

Southern Co. (4.1% Yield)

I like this company enough to own shares myself. Southern Co. (NYSE:SO[8]) earns my trust as the owners and operators of Alabama Power, Georgia Power, Gulf Power and Mississippi Power, each of which is an operating public utility company. That is a lot of power for a whole swath of the country.

Southern also owns Southern Power Company, which builds, owns and runs power generation assets, including renewable energy projects, and also sells excess electricity at market rates in the power marketplace. So yes, SO has a hand in virtually every area of the power market, always with an eye to the future.

Trailing and forward P/Es of 19 and 17 aren’t anything to scream about, but they’re not overly onerous, either. And you not only get a company that powers out over $2 billion in earnings on nearly $18 billion in revenues, but you get one whose $4 billion cash flow helps pay out almost two bucks per share every year to investors.

The math tells me my 4%-plus yield in a nice, stable utility will make me forget about Treasuries in no time. It should tell you the same.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long SO.

  1. changes from bad to worse: https://investorplace.com/2012/07/is-spain-the-opportunity-of-a-lifetime-or-a-wicked-value-trap/
  2. already have lowered guidance: https://investorplace.com/2012/07/wall-street-earning-warnings-bloodbath/
  3. getting killed by a stout dollar: https://investorplace.com/2012/07/strong-dollar-is-slicing-corporate-sales/
  4. record-low yields on U.S. Treasury securities: https://investorplace.com/2012/04/treasury-yields-tarnished-again/
  5. optimism of a rebounding housing market: https://investorplace.com/2012/07/the-ho-hum-truth-about-the-housing-market/
  6. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW
  7. UTX: http://studio-5.financialcontent.com/investplace/quote?Symbol=UTX
  8. SO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SO

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