Once upon a time I worked in an office beneath a sign that read, "We're a nonprofit company . . . but we didn't plan it that way."
I'm reminded of that as I write this week about all the wonderful buys this market correction has created for dividend-income investors.
I'm a dividend-income bargain hunter . . . but I didn't plan it that way.
Here's why: I think the bargains in this market are too amazing to pass up. The 12% drop (as of May 25) in the Standard & Poor's 500 Index ($INX) from the April 23 high has pushed up yields to the point that some stocks I never thought I'd put in my dividend-income portfolio are begging to join it: Intel (INTC, news, msgs), yielding 3.1%; Nucor (NUE, news, msgs), at 3.4%; Nokia (NOK, news, msgs), at 4.3%; and Taiwan Semiconductor Manufacturing (TSM, news, msgs), at 3.7%. But why not when a 10-year Treasury is yielding just 3.15%?
If I can find yields like that by just rolling out of bed and over to my computer, think what a little digging will do.
Greedy for yield
You remember the rules of the dividend-income portfolio, right? The goal is to beat the yield on the 10-year Treasury with the dividend from a common stock (or its near equivalent). By sticking to common stocks, for which the dividends rise over time (if you pick the right stocks) -- unlike bonds, for which the coupon interest rates are fixed at issue -- I gain an edge against any return of inflation or higher interest rates.A stock such as Verizon (VZ, news, msgs), for example, which has grown its dividend payout by almost 4% a year over the past five years, provides good protection for income investors against rising interest rates.
So in adding to the portfolio now, I'm a little less concerned about avoiding interest-rate increases and a little more concerned with getting more yield, a lot more yield, than I'd get with a much less risky Treasury note.
So I'm looking for a stock or two that will beat not just the 3.15% yield on the 10-year Treasury but also the 4.28% yield on Rayonier (RYN, news, msgs) and the 4.63% yield on DuPont (DD, news, msgs). They're the lowest-yielding stocks in the portfolio aside from Telkom Indonesia (TLK, news, msgs), but I think that stock has more upside in any end-of-2010 recovery from the current emerging market sell-off.
OK. If I'm selling Rayonier and DuPont out of the dividend-income portfolio, what am I replacing them with? (I'm also selling Rayonier out of the Jubak's Picks portfolio. You'll find more detail on that sell Friday in a Top Stocks blog post.)
There are high-yielding stocks that I think are just too risky. Deutsche Telekom (DT, news, msgs), for example, yields 9.6% now, but its wireless business is struggling, and I don't see a turnaround as likely. Barnes & Noble (BKS, news, msgs) yields 5.2%, but, well, you know what's going on in the book business these days.
On the other hand, I would say that Spain's Banco Santander (STD, news, msgs) isn't as risky as it seems, and the American depositary receipt's 8.5% yield amply compensates me for that risk. Banco Santander looks like it's going to emerge as one of the winners of Spain's banking crisis.
Spain's big banks have lost market share in the past two years to regional banks that have kept on making real-estate loans even as the risk of those loans defaulting was climbing. Now those regional banks are in deep, deep trouble, and the Bank of Spain, the nation's central bank, has begun shutting the worst of them and forcing others to combine. I think that will put business back in the hands of Banco Santander and Banco Bilbao Vizcaya Argentaria (BBVA, news, msgs). The dividend yield on Banco Bilbao is just 6.2%. (For more on the state of banking in Spain in particular and Europe in general, see this blog post.)
(Most U.S. banks haven't yet restored the dividends on their common stock that they were forced to cut when they took taxpayer cash in the post-Lehman Brothers bailouts. I have found one interesting play among the U.S. group -- although since it's not a common stock, it doesn't fit in my dividend-income portfolio. But it might fit in yours, so let me mention it. The security is JPMorgan Chase, 8.625% Non-Cumulative Preferred Shares (JPM-I, news, msgs). At Charles Schwab, where I bought some recently, the symbol is JPM+I. The CUSIP number is 46625H621.
The preferred shares were issued with a coupon rate of 8.625%. On May 25, they were trading slightly above the par value of $25, so the yield was about 7.9%. The shares have traded as high as $29 recently, and I wouldn't buy there, since they could be called away from investors at $25 as early as September 2013. But if you can buy the shares near $25 or $26, I think the yield and the potential capital gain from any reduction in sector risk make the shares attractive.)
Continued: A European oil stock to consider
