Occasionally, I pen a column that strikes a nerve with readers and I get a few emails questioning my sanity. Such was the case with a recent piece on dividend-paying stocks. My inbox filled up as people pointed out the zero-interest-rate policy makes high-yielding stocks a great alternative to traditional income investments. Since I have been saying that for three years, I am well aware of this fact. But high-yield stocks were not just a great income alternative three years ago, they were cheap. Stocks may still look good compared to T-Bills or CDs but, for the most part, they really are not cheap anymore. The dividend bandwagon has gotten very crowded.
The market is making my case for me. We have had a great rally since the first of the year but many of the dividend favorites are actually down year to date. This morning I ran a screen of high-yielding stocks that are down on the year. Many of the stocks suggested by the newly minted dividend geniuses at year's end are down for the year in spite of their attractive payouts. Pfizer (PFE), Philip Morris International (PM) and other stocks that were featured alternatives for fixed income investors have not participated in the rally. The leading telephone stocks have not done much, as Verizon (VZ) is down slightly and AT&T (T) is flat year to date. Many of the leading utilities are selling off in the new year despite their attractive dividends and talk of increased economic activity. When something is widely known in the stock market, there is a very good chance it is no longer true.
This has led to an obvious question. In spite of my thoughts that it is best to wait to put new money to work until the dividend payers are less loved and a lot cheaper, it is possible that I am wrong (according to my wife and kids this occasionally happens), and I have been asked for names I might be willing to buy today. I thought about this and ran a few screens looking for high-yield stocks worth buying now. I came up with something you that can buy with the obligatory advice to move slow and stay small.
RadioShack (RSH) has been crushed in the past year. Declining sales and profit have caused investors to abandon the stock since private-equity buyout rumors pushed the shares above $20 in 2010. The stock is down almost 25% since the first of the year. Business is horrible right now. But there are some reasons for long-term optimism. The company is replacing Wal-Mart's (WMT) Sam's Club kiosk business with Target (TGT) locations and as this process is completed, it should spur sales. In September, the company opened a sales relationship with Verizon and that should help as RSH can now offer Apple's (AAPL) iPhone. Management has thankfully suspended the $200 million stock buyback to preserve cash but affirmed their commitment for now to paying the dividend. At the current price the shares are below tangible book value and yield 6.8%
The plunge in RadioShack also makes it one of the very few stocks worth using in an options strategy. The implied volatility of the April options is 60, well above the current Volatility Index reading of 17.7. While not an apple-to-apples comparison of volatility, it does give us a good idea that RadioShack options are much more expensive than most options in the current market. It is worth considering selling an April $7 put to back into the stock. If the shares firmed up at all and I owned the shares, I would consider selling the $10 calls as well. The stock is probably not going to stage a substantial rally for some time unless private equity does in fact show up as a buyer. That makes the stock a strong candidate for an options-selling program for 2012.
Chasing yield is dangerous after a run-up in high-yielding stocks. Everyone loves them and the major names are over-owned. Be patient and buy what everyone else hates to achieve long-term success.