Now that the post-move frenzy has died down at the new southern location of Chez Melvin, I found time last night to go through reader comments. One of the chief concerns expressed is what to do if you need to invest for income right now. This is a frustrating topic for many, especially those new to the need for income. If you have been investing over the past four years, you should be in good shape with a portfolio of stocks with decent yield bought during sharp declines. We had one 10% peak-to-trough decline this year, but it didn't last long or present much opportunity to put money to work.
If you are trying to assemble a portfolio of income stocks now, you will have to work at it. I would start with unconventional yield stocks. Over the past few weeks, I have discussed stocks that offer high yields and compelling valuations, like Apollo Investment (AINV), Prospect Capital (PSEC), FLY Leasing (FLY), Star Gas Partners (SGU) and BGC Partners (BGCP). Use common sense and keep individual positions small. Buy on down days and plan to own them a long time.
To fill out your income portfolio, you have to be a daily shopper. Each day you need to go through the list of stocks with decent dividends that are trading near new lows. Once you have a list as a starting point, you have to go thought the list and look for stocks that are fundamentally sound. Volatility we can live with, but a permanent loss of capital we cannot. I look first at the price-to-asset value and then run stocks through my intrinsic value calculations and other valuation models to look for situations that can give me a return on my money over time.
One of the stocks that caught my eye is Cliffs Natural Resources (CLF). I have owned this stock in the past and I like its management. The stock is trading at about half my intrinsic value calculation but at a premium of 1.4x tangible book value. The 5.6% dividend yield is attractive, but if iron ore prices continue to decline, that payout could be at risk, according to recent analyst reports. I am going to wait a bit, but CLF is on my watch list. This U.S.-based company has substantial exposure to fast-growing markets like China, India and other parts of Asia. At the right price, I want to be an owner.
Avon Products (AVP) also makes the list. The stock has a 5.8% yield and is trading near the 2009 lows. After turning down a $23.25 a share offer by Coty Inc., the stock has moved straight down. The company is in a mature business that is very reliant on discretionary consumer spending, but I believe the risks are priced in the shares at this level. The company has doubled its dividend over the past decade and I believe the payout will increase at roughly the same rate as U.S. economic growth in the future. I do not think the stock is cheap enough for deep value portfolios yet, but income buyers can begin to accumulate shares at this price.
World Wrestling Entertainment (WWE) is also trading down near new lows. This company is probably close to the equivalent of a buggy whip manufacturer. Mixed martial arts has put a huge dent in the wrestling entertainment franchise, but there will continue to be a shrinking market for their TV shows, pay per views and merchandise for many years. In the meantime, the McMahon family will continue to take money out of the company in the form of dividends until the WWE is no more. Plugging the dividends payout into a discount model, I come up with a value of about $10 a share. Trading above $7, the discount appears wide enough for income investors to buy the stock.
If you are putting money to work in income stocks, you have to focus on valuation. Look for opportunities where others are not. Work at it every day to put together a portfolio of stocks that not only pays a high yield, but also does not expose you to permanent loss of capital.
