Dividend Stocks for Patient Investors

 | Apr 24, 2012 | 12:35 PM EDT
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If a bird in the hand is worth two in the bush, then at the current market juncture, investors should view the dividends available from select equities as a bird in the hand.

Many investors have been disappointed by the returns they have seen from dividend-paying stocks. And all over the country, investment professionals overseeing billion-dollar pension funds continue to face shortfalls as a result of relying on rosy return forecasts. The consequences of unrealistic expectations are most severe when markets are in an upswing. Many investors get a false sense of hope that future returns will continue to be high.

We are all told that over the long run, the U.S. market can be expected to rise by about 9% to 10% a year on average, since that has been the historical rate of return over a long stretch of years. Only in the fine print do you realize that half of that historical return is a result of dividends.

Still, today, some attractively priced stocks offer incredibly attractive yields. Yields and stock prices have an inverse relationship; the yield goes up when the stock price goes down. Usually, an abnormally high yield indicates that the dividend could be in trouble. But that's probably not the case with Transocean (RIG), which, at today's price of $49, yields 6.3%.

Despite a weak 2011, Transocean's ulta-deep-water rigs are contracted out for 2012, and strong oil prices will likely put many of the company's other rigs to work. After the massive oil spill in 2010 in the Macondo prospect in the Gulf of Mexico, one big lawsuit implicates all the major parties involved. Transocean is indemnified by BP (BP) except in instances of negligence. The worst-case scenario would be damages in excess of $20 billion, but even so, BP would likely bear the lion's share. Until the lawsuit is settled, Transocean shares may continue to disappoint, but you will collect nearly 7% while you wait. And when all is said and done, the company will still have the deepest fleet of oil rigs, which will be earning more and more money in the future.

One of the most recession-proof businesses also happens to be one that many people don't want to think about: funerals. StoneMor Partners (STON) is the second-largest owner and operator of cemeteries in the U.S. Things have been tough lately for StoneMor. The company lost money in 2011 and recently suffered a credit downgrade. At $25 a share, the currently payout is 9.4%. StoneMor will likely experience losses again in 2012. The distribution should be fine, since the cash is being paid from a trust. Funerals aren't going anywhere, and StoneMor is making acquisitions. The strength of the yield should keep investors loyal.

Small-cap hunters may appreciate micro-cap Ark Restaurants (ARK), which owns and operates 50 restaurants and fast-food concepts in major cities including New York, Las Vegas and Washington. Shares trade for $15.30 and yield 6.6%. The company has no net debt, has been consistently profitable over the past three and generates ample cash flows.

Investors should take a close look at some of the yields still being served today in the equity markets. Going forward, these dividend payers are likely be solid creators of value for patient investors.


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