How to Play Consistently Low Pay

Several companies aren't boo-hooing a bleak wage outlook

By Alyssa Oursler, InvestorPlace Contributor

Everyone might want an economic recovery, but everyone isn’t going to get it. And by everyone, I especially mean workers who are getting the short end of the stick on wages.

In 2010, 28% of workers in the U.S. held low-wage jobs — jobs that paid just as much or below what full-time workers need to earn to live above the poverty level for a family of four, according to the Economic Policy Institute.

The bad news: That number isn’t expected to get any better.

A recent study by the EPI found that the number of low-paying jobs is expected to stay roughly the same through 2020, as the economy just won’t be able to support any growth in jobs with higher salaries, CNN Money recently reported. Last year, the salary cut-off for a low-wage job was around $23,000, or just more than $11 an hour — a pay range that surely isn’t good for workers or for the broader economy.

Living at the poverty line without benefits or vacation and with little room for advancement isn’t something you would wish on anyone. Still, as bad as it sounds, the continuation of this trend actually would bode well for some publicly traded companies.

Discount Retailers

One effect of this trend was just mentioned: lower consumer spending. And while slow spending isn’t exactly ideal, considering that consumer spending makes up around two-thirds of the economy, it could be beneficial for discount retailers.

The idea is pretty simple: As long as wallets are light, people will hunt for bargains. The dollar store bunch — Dollar Tree (NASDAQ:DLTR), Family Dollar (NYSE:FDO) and Dollar General (NYSE:DG) — could keep on growing in years to come, plus, you can’t forget about trusty deep-discounter Wal-Mart (NYSE:WMT), a go-to for cash-conscious consumers.

The same is true in the apparel realm. Look at TJX Companies (NYSE:TJX), for example, which owns T.J. Maxx, Marshalls and Home Goods — its stores sell brand-name, quality products at substantial markdowns. Ross Stores (NASDAQ:ROST) is part of the same niche, offering fashion finds that don’t feel cheap, but still draw in value-oriented customers.

With consumer spending already weighing on shoppers, it’s no surprise that these companies have been booming. Since Jan. 1, all six are up in double digits, Wal-Mart has reached all-time highs and TJX and ROST have gained more than 40% each.

Another option would be to look for an exchange-traded fund that encompasses this trend. While a retail ETF might seem counterintuitive to a drop in consumer spending, the PowerShares Dynamic Retail ETF (NYSE:PMR) actually has TJX Companies, Ross Stores, The Dollar Tree and Wal-Mart in its top 10 holdings. The fund also has high weightings in self-service kiosk maker Coinstar (NASDAQ:CSTR) and auto parts retailer O’Reilly Automotive (NASDAQ:ORLY) — both of which could thrive in a low-income environment.

Health Care Providers

Low-paying jobs also tend to come with another caveat that we breezed over earlier: They don’t offer benefits like pension plans or health insurance. This news, along with the recent health care ruling, could mean that companies with heavy reliance on Medicare and Medicaid could continue to see steady growth down the road.

A company like WellPoint (NYSE:WLP), which recently acquired managed care provider Amerigroup (NYSE:AGP), is a possible play, as the acquisition will increase WellPoint’s Medicare and Medicaid coverage. Centene (NYSE:CNC) also provides programs and services to a number of under-insured and uninsured individuals — like, say, ones that don’t get covered through work. The company has the potential to grow on its own, or could be bought out by a big-name insurer like Amerigroup was.

The health care angle also can be played more broadly through an ETF. For instance, the iShares Dow Jones US Health Care ETF (NYSE:IHF) includes big insurance names like WellPoint, UnitedHealth Group (NYSE:UNH) and Aetna (NYSE:AET), pharmacy benefit manager Express Scripts (NASDAQ:ESRX) and even Buffett holding DaVita (NYSE:DVA), a provider of dialysis treatment. And even if pay conditions improve, hey — everyone still needs health care.

Other Penny-Pinching Plays

As people are short on money, they occasionally need small loans that many traditional banks won’t make. Payday lenders like Cash America International (NYSE:CSH), however, offer unsecured, short-term loans with high interest rates. Such loans are popular among people earning below $40,000 annually and often are used to cover recurring expenses, according to a recent Pew study — and the need for such cash should remain steady as the number of low-income individuals does.

On the flip side of the debt coin, some people who take out loans might be unable to pay them thanks to their low income. Encore Capital Group (NASDAQ:ECPG), which is engaged in consumer debt buying and recovery and is up nearly 50% year-to-date, could thus continue to go strong.

It doesn’t end there. Companies like Rent-a-Center (NASDAQ:RCII) could see business increase — as it has over the last year by around 46% — as people try to save money by finding alternatives to buying. Not to mention, pawn shops like EZCORP (NASDAQ:EZPW) could boom. Pawn shops provide a quick way to turn old belongings into cash, which could come in handy for low-wage workers, though low gold prices have made them less popular of late.

If You’re Feeling Lucky

People won’t just be trying to get by, though — chances are, they’ll also be hoping they strike it rich. Recent studies have looked at households banking less than $13,000, which fall into this low-paying category by a landslide, to see how much of their annual income they spend on lottery tickets. Some found it was around 2% or 3%, while others cited upward of 9%.

If the number of people struggling to get by stays steady or worsens, lottery spending could have the same fate, too. Lottery sales have indeed been surging — “despite a struggling economy — or perhaps because of it,” as USA TODAY reported last year, when 41 states saw lottery sales grow, and nearly half of those set records for sales.

If you want to play this angle, though, you might be gambling just as much as those who play the actual lottery. Just look at one option: Scientific Games (NASDAQ:SGMS), a global supplier for lottery organizations.

SGMS was off around 15% Tuesday on the heels of a lackluster earnings report — the company’s revenues have increased for four consecutive quarters, but earnings haven’t been nearly as steady. The company reported a loss of 14 cents per share, while the Street expected 12 cents in profit. The company is attempting to reap profits by streamlining operations, though it’s still having mixed results from its overseas operations. Lottery as a trend might be on the upswing, it’s uncertain whether SGMS can regularly turn a profit off it — but its aggression toward expansion might make it worth a look.

As of writing this, Alyssa Oursler did not hold a position in any of the aforementioned securities.

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