In recent months I have talked a lot about dividend-paying stocks not to buy.
I have been working in and around the markets for almost three decades now, and the worst mistakes I have seen have been as a result of the search for yield.
Today, the search for yield is harder that it has ever been, and the low-rate backdrop causes many inexperienced investors to enter the equity markets to find badly needed income. At the same time, many dividend stocks are far too richly valued given their prospects and condition.
Seven years into a bull market, it is time to be very cautious and selective when putting money to work in dividend paying stocks. I want to limit my purchases to those in solid financial condition that are available at low valuations to provide portfolio income.
Dividend Stocks to Bet On: BG Staffing Inc (BGSF)
BG Staffing Inc (BGSF) is a great example of the type of stock that I want in my income portfolio.
The Plano, Texas-based staffing company works in three sectors: Multifamily housing, professional services and a commercial division that provides skilled and unskilled workers to distribution and logistics customers.
The company is in growth mode and is projected to stay there, with annual earnings growth of around 20% a year projected for the next several years. The company earns a Piotroski F-Score of 7 which tells me that the financial conditions and company prospect are on solid footing at the moment.
The enterprise-value-to-earnings-before-interest-and-taxes (EV/EBT) ratio is just 9.7 which is a little less than two-thirds of the average S&P 500 component multiple right now.
BG Staffing recently did a stock offering that raised $15 million to pay down outstanding debt, reducing the riskiness of the balance sheet even further.
The stock yields 6.8% right now and is a great candidate for income-seeking investors to consider.
Dividend Stocks to Bet On: New Media Investment Group Inc (NEWM)
New Media Investment Group Inc (NEWM) is also an excellent income choice right now.
Although the newspaper business may be in general decline, New Media owns small-town newspapers in cities like Grove, Oklahoma; Oak Ridge, Tennessee; and Massillon, Ohio. In all they own 452 community print publications, 379 websites, 360 mobile sites and six yellow page directories, including 124 of the smaller city and town daily newspapers.
Warren Buffett bought a bunch of small town papers a few years ago and said in his 2012 shareholder letter “Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town — whether the news is about the mayor or taxes or high school football — there is no substitute for a local newspaper that is doing its job.”
The enterprise multiple is 9.9 and the shares currently yield 7.6%. The F-score of 7 is an indication that finances are strong and the future is bright for this company and its shareholders.
Dividend Stocks to Bet On: A.H. Belo Corporation
A.H. Belo Corporation (AHC) also owns newspapers, but they have larger city papers, including The Dallas Morning News, The Denton Record-Chronicle and Al Dia, a Spanish-language newspaper.
The company has diversified its business over the past several years and now also offers digital marketing and commercial printing services.
The digital business is growing nicely, as it increased 23.5% in the first quarter and is up to 18.5% of total revenues for the company now. Management also said that they were able to reduce expenses by about 8.9% in the quarter.
The company earns an F-score of 7 and is undervalued on an asset basis at just 94% of book value. At the current price, the shares yield 6.4%.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.