Over the weekend, I worked on putting together a portfolio of safe and cheap stocks that have decent dividend yields. I am seeing a lot of yield chasing these days, and that usually has disastrous results for individual investors.
In our first two screens, we thought we had found six stocks, but in the latest reminder that stock screens are merely a starting place, the screener didn't catch the fact that MFC Industrial (MIL) recently suspended dividend payments to conserve cash. That leaves us with five safe and cheap income stocks, a long way from the 30 stocks Benjamin Graham suggested would make for an individual investor's portfolio.
No portfolio assembled today would be complete without some trade-of-the-decade smaller bank stocks. Consolidation is happening in the smaller regional and community banks, and it will continue to do so for an extended period of time. Higher regulatory costs are making it difficult for smaller banks to compete, and there is a real need to spend lots of cash for technology upgrades to compete in an increasingly mobile- and tech-sensitive marketplace. It just makes sense for many of the smaller banks to quit wasting shareholder money trying to remain independent in the face of historically low net interest margins and continually rising costs. Adding a few of these banks with solid dividends will give our income portfolio the potential for some capital gains from M&A activity as well.
Republic Bancorp (RBCAA) is a solid selection for an income portfolio. This bank has had to transform itself since the IRS slammed the door on widespread tax refund anticipation loans a few years back. This bank is actually looking to buy a smaller rival, with CEO Steve Trager telling shareholders recently that, "In addition, with the mergers and acquisitions market heating up, we will continue our efforts to find an acquisition candidate that fits with our company's long-term growth plans."
The bank has 40 branches, primarily in Kentucky, and $3.9 billion in assets with a solid loan portfolio and balance sheet. It cannot be ruled out as a takeover candidate going forward. The shares are cheap, trading at just 89% of book value, and the current yield is 3.09%. Republic is well capitalized with an equity to asset ratios of 11.97 and nonperforming assets are just 0.8% of total assets, so the bank is also cheap. It has a remarkable dividend growth record as the payout has been increased for 16 straight years.
California First National (CFNB) is a bank in that it takes deposits and make some loans, but the primary business is leasing high-tech equipment like computers, printing presses, production equipment and other items to businesses. It also leases low-tech stuff like mining machinery, school buses as well as dormitory and office furniture. As the economy slowly recovers, business is picking up for California First National. The company recently said that for the third quarter ended March 31, 2015, earnings improved by 41% year over year, and for the nine-month period the gain was 48%. The stock trades at less than 80% of book value and the shares currently yield 3.1%, so it's a good fit for an income portfolio.
Cape Bancorp of New Jersey (CBNJ) just barely passes the income floor I used for the screen, with a yield of 2.5%. While that may not be a booming yield, it is more than the markets, many of the dividend ETFs and 10-year Treasury and AAA corporate bonds right now. As a bonus, Cape Bancorp has the potential to increase its income stream in the years ahead at a faster pace than many alternatives. Although the home market of Atlantic City is struggling, the bank has been expanding into the Philadelphia suburban area with a focus on commercial lending. It just closed the acquisition of another bank to increase its asset base by almost 50%, and CEO Michael Devlin told shareholders this "will help Cape Bancorp deliver value to its shareholders through increased operating scale and cost efficiencies." Cape Bancorp shares are trading at about 90% of book value and are one of my favorite trade-of-the-decade small bank picks.
That brings us to eight stocks in our search to build a 30-stock safe and cheap income portfolio in today's richly valued, yield-starved world. Tomorrow I will see if we can follow insiders to high yields and potential profits.