Even as the stock market continues to flirt with new highs, income investors are struggling. The chief factors behind the market's climb -- low interest rates and fiscal stimulus programs -- have made it very difficult to find investments that provide needed income.
Typical fixed-income products provide little to no return, and the first-choice alternatives, blue-chip stocks, have been pushed up to unreasonable levels by yield-hungry buyers. Large-cap real estate investment trusts (REITs) and utility stocks have seen the same type of aggressive buying that makes them an overvalued, unsafe bet right now.
This morning, I looked for some income opportunities that are cheap compared with their asset value and seem to possess an adequate margin of safety as well. I have talked in the past about using income alternatives, but I limited this screen to operating companies that could have the potential for strong appreciation as well as providing a decent dividend payout. I set the screener to search for stocks that trade below book value and pay at least 4%. I found a few names that are worth considering for patient investors who need income.
The first stock on my list is a play on my article on Brazil from Wednesday. Banco Santander Brasil (BSBR) is the third-largest private lender in Brazil, and the company is planning to expand its loan book faster than the state-run banks. The shares are attracting the attention of some fairly smart investors. Tweedy Browne has been a buyer of the stock, and Morgan Stanley recently named the bank one of its top picks in Latin America. Analysts at the firm said in a recent report that the stock was unloved and under-owned and that it would not take much for a positive surprise to lift the stock higher. Banco Santander Brasil is trading at 77% of book value and is yielding over 9%. While some suspect that a dividend cut is in the cards, even a substantial reduction would leave you with shares yielding around 4.5% to 5%. Investors who have patience and a tolerance for some price volatility should do very, very well with this stock over time.
The only market segment on the planet that is worse than Brazil is coal. Teck Resources (TCK) is a Canadian mining company that produces metallurgical coal, copper, silver and zinc. Unfortunately for Teck, its biggest product is coal, and the global slowdown has depressed sales of met coal to steel producers. Business across it main product lines could be weak until we get a real global recovery, but the long-term trends favor the company, and it looks as though the negatives are priced into the stock. Right now, the shares fetch just 80% of tangible book value and yield 4.04%. The stock will probably have a great deal of volatility over the next several years, but in the long term it should provide substantial gains from the current level.
Summit Hotel Properties (INN) is a stock I have liked for growth and income for some time. The company owns 89 hotels with a total of 11,143 guestrooms in 22 states, and 75% of its properties are in the top 50 markets in the U.S. In its recent investor presentation, management pointed out the its strong relationships with hotel brands such as Marriott, Hilton, IHG and Hyatt provide it with what it called a "massive number of attractive acquisition opportunities."
Summit has been focusing its portfolio on locations near business headquarters, convention center, airports and tourist attractions that will attract guests. So far, the company has proven to be a smart manager of its properties and has done some strategic offerings of common and preferred stock in order to acquire new locations. The stock is well off Wall Street's radar screen, and it is cheap at 78% of book value. The shares yield 4.8%, and the company just raised the dividend back in January.
Searching for income in a yield-starved world can be a daunting task for many investors. The past several years of yield chasing have left few attractively priced income producing opportunities. By focusing on stocks that have attractive valuations as well as high dividend yields, investors can increase their chances of long-term success. These three stocks should help you meet your income needs and also provide substantial long-term appreciation.