“Price is what you pay. Value is what you get” — Warren Buffett“Price” and “value” are often two very different things. Though a single share cost more than $200,000, Buffett’s Berkshire Hathaway (BRK.A) is considered a value stock by many. Yet Twitter (TWTR), which trades hands for just $35 per share, is often called a bubble stock.
Yet cheap stocks are a hunting ground for some very smart, very successful investors. Joel Tillinghast, manager of the Fidelity Low-Priced Stock Fund (FLPSX), is one of the most successful fund managers of his generation, and he invests almost exclusively in stocks trading for less than $35 per share.
As Kramer points out, most “big money” institutional investors are prohibited from buying stocks priced at less than $10. And even if they have the ability, few have the intestinal fortitude. Their own research departments generally won’t cover these cheap stocks, and it’s a career risk to buy a stock that is too far out of the mainstream.
But the rationale for buying cheap stocks with single-digit price tags is straightforward. Due to the mechanics of the market, it’s generally a lot easier for a $5 stock to go to $10 than for a $50 stock to go to $100. Yes, the percentages are the same. But lower-priced stocks are often low-capitalization stocks as well. A large investor moving into a small-cap stock is going to move the price a lot more that he would in a large, liquid stock with an enormous float.
The key is finding these gems before the big boys do.
Today, we’re going to take a look at seven cheap dividend stocks trading for under $10. All have a few bumps and bruises on them; you simply don’t get this kind of pricing otherwise. But all are also solid dividend payers worth a good, hard look.
Cheap Dividend Stocks: Banco Santander (SAN)
Price (as of 6/19): $7.24
Dividend Yield: 6.3%
With Greece likely to default and send shockwaves through the eurozone, a European bank might seem like an odd choice of investment. Yet Banco Santander (SAN) is one of biggest, best-managed and most globally diversified banks in the world.
And its U.S.-traded ADR also ranks among the highest-yielding cheap dividend stocks. Shares go for just more than $7 per share, and at current prices and exchange rates, Santander’s expected 2015 dividend of 0.4 euros works out to a yield of about 6.3%. (And even backing out Spain’s withholding tax, it still yields 5%.)
Santander cut its dividend earlier this year, as incoming Executive Chairman Ana Botín made boosting the bank’s capital cushion a top priority. That diluted existing shareholders — which is part of the reason the shares trade at the bargain prices they do today — but it also made Santander a safer, more conservative bank going forward.
An unruly default in Greece will probably rattle Santander’s stock. If it does, use the volatility as an opportunity to load up on a cheap stock with a fantastic dividend.
And here’s one more thing worth mentioning: Legendary contrarian value investor David Dreman has recently become a strong buyer. Dreman initially purchased Santander in 2010 and has grown his share count from 111,820 shares to 631,135 as of last quarter.
Cheap Dividend Stocks: Prospect Capital (PSEC)
Price (as of 6/19): $7.74
Dividend Yield: 12.9%
There’s a reason for that. At current prices, around $7.70, I consider it one of the best cheap stocks in America today — because it’s not just cheap; it’s a bargain.
PSEC trades at a 25% discount to book value … a book value that was just reaffirmed this past quarter. To put that in perspective, its peers in the BDC sector trade at an average discount to book value of just 6%. The last time Prospect Capital was this cheap, it returned 60% in capital gains and dividends over the following 12 months. Even if we got only half that return this time around, we’d be doing better than we could just about anywhere else in this overpriced market.
Prospect Capital’s dividend, which is paid monthly, works out to a 13% dividend yield at today’s prices. And I expect the dividend to be safe for at least the next nine to 12 months. Prospect Capital cut its dividend last year as part of a larger strategy to de-risk the company. While the dividend cut was not popular with investors — and is a big reason why the stock trades at the discount it does today — it was the only sensible move. Management wanted to avoid reaching for yield, risking defaults and ultimately putting the company at risk.
The good news is that, with the dividend cut out of the way, investors can feel a lot more comfortable with today’s very attractive payout.
Cheap Dividend Stocks: Lexington Realty Trust (LXP)
Price (as of 6/19): $9.36
Dividend Yield: 7.3%
Up next is a REIT that has taken its knocks, Lexington Realty Trust (LXP).
As with the rest of the REIT sector, 2015 has not been kind to Lexington. As recently as January, it was trading for $11.69 per share. Fears of Fed tightening have taken a wrecking ball to bond prices and to the prices of “bond-like” investments — including high-yielding dividend stocks like REITs. So the selloff in Lexington shares has relatively little to do with the REIT itself, and a lot to do with macro concerns about interest rates.
But even so, Lexington is cheap relative to its peers. According to REIT guru Brad Thomas, Lexington has one of the lowest price/FFO multiples in the REIT universe at just 8.9. To put that in perspective, blue-chip Realty Income trades at a P/FFO multiple of 17.6.
Lexington is a riskier REIT than Realty Income and should trade at a modest discount. But the discount we see today is anything but modest.
At today’s prices, Lexington would seem too good to pass up.
Cheap Dividend Stocks: Fortress Investment Group (FIG)
Price (as of 6/19): $7.71
Dividend Yield: 4.2%
Going a very different direction, we come to private equity manager Fortress Investment Group (FIG). Despite the size of its business — Fortress has $70 billion under management scattered across various funds and strategies — Fortress lands on this cheap stocks list at roughly $7.70 per share.
Fortress is best known as a private equity manager, and the firm’s biggest investments in this space are in transportation, infrastructure, financial services and senior living. But private equity only accounts for for about $15 billion of Fortress’s total assets under management. Fortress also manages about $14 billion in distressed debt funds and about $8 billion in aggressive hedge fund strategies. But the bulk of Fortress’s business — at $33 billion in assets — comes from good, old-fashioned plain-vanilla bond portfolios.
Fortress’s stock price has struggled over the past two years and has been choppy and volatile since coming out of the 2008 meltdown. But Fortress has beaten the pants off the S&P 500 since the beginning of 2009, generating returns of 650% to the S&P 500’s 160%.
FIG, like the rest of the financial sector, might have a hard time navigating the Fed’s coming tightening cycle. Only time will tell. But at current prices, FIG’s among dividend stocks worth a stab.
Cheap Dividend Stocks: TransAlta Corp (TAC)
Price (as of 6/19): $7.90
Dividend Yield: 7.3%
Next up is Canada-based utility TransAlta Corp (TAC), a non-regulated power generation company with operations in the United States, Canada and Australia.
TransAlta owns and operates hydroelectric, wind, natural gas and coal-fired facilities. It also actively trades electricity and other energy-related commodities and derivatives.
TAC has had a rough run. As recently as two years ago, shares traded hands for more than $14 per share. Today, shares fetch just less than $8.
TransAlta’s dividend will appear variable over time to American investors. That’s because, as a Canadian company, it declares its dividends in Canadian dollars. TransAlta’s dividend has been set at 18 Canadian cents per quarter since April 2014. At current exchange rates, that works out to 14.6 U.S. cents for a dividend yield of 7.3%.
That’s not too shabby. Though be warned: TransAlta aggressively cut its dividend in 2014 from 29 Canadian cents per quarter.
Cheap Dividend Stocks: Braskem SA (BAK)
Price (as of 6/19): $8.24
Dividend Yield: 4.4%
Next, we get to Brazilian chemical producer Braskem SA (BAK).
You can roughly think of Braskem as the Brazilian equivalent of Dow Chemical (DOW), though it specializes specifically in petrochemicals.
And speaking of “petro,” Braskem is an affiliated company of Brazilian oil major Petrobras (PBR), which partially explains why the share price has plunged to the depths that its has. Petrobras was embroiled in a corruption scandal last year that still threatens to bring down the presidency of Dilma Rousseff.
Braskem has been trading in the low $8s after trading as high as high as $15.59 last November, so while it sits among cheap stocks, this is only a relatively recent development.
Your biggest concern with Braskem is Brazil’s macroeconomic stability. The Brazilian economy is slowing, even while inflation is on the rise.
It’s the modern-day version of 1970s stagflation, and it isn’t pretty.
All the same, Brazilian stocks are cheap, and strength in the Brazilian real due to central bank tightening should be good for holders of the American ADRs. Consider Braskem a high-risk but potentially very high-return play on a Brazilian return to macro stability.
Cheap Dividend Stocks: American Realty Capital Properties (ARCP)
Price (as of 6/19): $8.59
Dividend Yield: 12.9%
It may be a little controversial to include American Realty Capital Properties (ARCP) on this list of cheap dividend stocks. After all … it doesn’t actually pay a dividend.
ARCP temporarily suspended its dividend late last year as it dealt with the fallout from its accounting snafu. However — and this is why we’re including ARCP on this list — management has been somewhat vague about when the dividend will be reinstated, though analysts that follow the stock expect it by later this year.
While they are waiting, investors can buy an inexpensive REIT loaded up with high-quality retail properties trading for just $8.66 per share.
Accounting scandals are an ugly affair and bring to mind the unfortunate Enron affair. But after its travails and subsequent audits, ARCP may very well now have the cleanest and most conservative accounting books in America. And because investors are still wary of the stock, we can get it at a fantastic price. Shares of ARCP trade for just 86% of book value. To put that in perspective, Realty Income (O) — considered by most analysts to be the blue chip in the triple-net retail REIT sector — trades for more than double book value.
It might be a while before investors award ARCP a similar valuation. But buying at today’s prices, we have a wide margin of safety. And once the dividend is reinstated, I would expect a dividend yield somewhere in the ballpark of 5%-7% based on today’s prices. Perhaps even higher.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long ARCP, O, PSEC and SAN. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.