There’s a problem for investors who like lower-priced stocks and are looking for dividends. The universe of dividend stocks that have low share prices is going to include a number of businesses in decline.
After all, a declining share price alone leads to a higher dividend yield. If a business is in trouble — where the stock is falling but it hasn’t cut the dividend yet — that yield can get particularly high. As an example, take stocks like Mattel, Inc. (NASDAQ:MAT) and most notably Frontier Communications Corp (NASDAQ:FTR) — which at one point last year had a share price just over $1 and a 20% dividend yield. Both stocks had cheap handles and high yields — but both businesses were struggling. Both companies since have suspended their dividend — and only fallen further.
An investor needs to look beyond the price and the yield to the business. Relying on a dividend for income is a dangerous spot to be in if that dividend is cut — or ended. But these 3 dividend stocks to buy shouldn’t have that problem. All three trade at under $20, and offer dividends that should not only be safe — but even have the potential to grow. As such, they should be welcome additions to any investor’s portfolio.
3 Dividend Stocks to Buy for $20 or Less: Ford (F)
I’ve generally been rather bearish on Ford Motor Company (NYSE:F) — but I’m starting to come around. As I wrote in December, opportunities in China and electric vehicles offer long-term potential. A steep sell-off in January brought Ford’s dividend yield back above 5% (F stock currently yields 5.3%). And though this isn’t a dividend growth play — and still has ‘yield trap’ risks — the recent Q2 report makes Ford stock look quite intriguing at current levels.
Earnings themselves were solid enough, with Ford beating Street estimates in terms of both sales and EPS. But the bigger news was the company’s decision to cut costs by slashing its North America car portfolio. The move, along with other expense-saving efforts, should accelerate Ford’s operating margin expansion and improve profitability over the long haul. And with Ford stock still trading at barely 7x 2019 consensus EPS, that improvement no longer looks priced in.
Again, this is a higher-risk play — and investors would be wise not to focus solely on the 5%+ yield. Ford has a substantial amount of debt and pension expense. The “peak auto” concerns I’ve detailed in the past aren’t gone. But if Ford can even keep earnings stable or close, it can easily cover its dividend and expand recent special dividend payments as well. And if the decision to prune the portfolio pays off, F stock will see some gains itself as well.
3 Dividend Stocks to Buy For $20 or Less: AVX (AVX)
Electronic component manufacturer AVX Corporation (NYSE:AVX) has seen a sharp, and somewhat unexplained, pullback over the last few sessions. AVX did report earnings last week, which seems to have catalyzed the selloff.
But the reaction doesn’t make a whole lot of sense. AVX actually posted a solid fiscal Q4, with revenue up year-over-year even excluding help from two recent acquisitions. AVX is losing its resale business with majority owner Kyocera Corp (ADR) (NYSE:KYO), but that transition was announced several quarters ago, and margins in that business are relatively slim.
Overall, it seems there may be some confusion amid a series of moving parts. But the decline to an 18-month low looks like far too much. AVX still has 30% of its market capitalization in cash. Excluding that cash, AVX trades at about 12x FY18 (ending March) earnings and free cash flow. Add to that a price-to-book ratio barely above 1.1x and AVX looks rather cheap.
Indeed, AVX stock is too cheap given the growth opportunities ahead. AVX has a substantial presence in the automotive space (44% of fourth quarter revenue). Increased in-car technological content and, eventually, self-driving cars, should drive higher demand over the long term. Margins, particularly gross margins, are below historical averages at the moment. But pricing remains strong and AVX has room to drive incremental expansion as it integrates its recent acquisitions.
Meanwhile, AVX now offers a healthy 3.11% yield — and its annual payout actually has increased 32% over the past five years. The strong balance sheet — and help from tax reform, which allows the company to repatriate earnings from overseas — provides plenty of support for those payouts going forward. Potential growth could lead to further hikes.
This isn’t a perfect bull case. Kyocera’s 72% ownership does leave a small float, which limits the company’s options somewhat and adds to volatility. But that volatility has, at the moment, created a buying opportunity. Under $15, AVX looks like a steal.
3 Dividend Stocks to Buy for $20 or Less: Host Hotels and Resorts (HRT)
REITs are popular picks for income investors, and Host Hotels and Resorts Inc (NYSE:HST) looks like an attractive choice in the space. The S&P 500 component owns 87 hotels in the U.S. and 6 more overseas. It focuses on high-end nameplates with partners like Hyatt Hotels Corporation (NYSE:H) and Marriott International Inc (NASDAQ:MAR) in major markets (San Francisco, Los Angeles, and New York among them).
Growth has been a bit light of late. Adjusted FFO (funds from operations, a common measure of REIT profits) in 2017 was flat. Comparable hotel EBITDA rose just 1%, and guidance suggests a similar performance in 2018. But there are some long-term growth opportunities ahead. Host Hotels picked up three hotels from Hyatt for $1 billion in February. A sale of the W New York will offset the benefits this year, but should add to 2019 growth.
HRT has substantially deleveraged its balance sheet over the past few years, leaving it room for more purchases. And its focus on high-end city center properties gives it some protection from supply growth and from competition from Airbnb.
Meanwhile, HRT provides a a solid, albeit stagnant, 4.1% dividend yield. And it’s not priced for much growth, trading at 12x the midpoint of 2018 FFO guidance. Should the company’s plans bear fruit in 2019 and beyond, both the stock price and the dividend should rise. Investors would do well to get long HRT before then.
As of this writing, Vince Martin has no positions in any securities mentioned.
Editor’s note: a prior version of this story has an incorrect link to the quotes page for Host Hotels and Resorts Inc (NYSE:HST). It has been updated here.
