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  1. Home
  2. / Investing

Two Dividend Stocks I Own and One I'm Looking to Buy

These stocks aren't going out of style.
By DAVE BUTLER
Feb 13, 2019 | 03:23 PM EST
Stocks quotes in this article: LYG, UBS, MPW

Cheap valued stocks with high yields will never go out of style. I could go on about the powers of compound interest, but I think we're all aware of its majesty. Here are two names I hold in my portfolio yielding strong dividends, and one name I'm looking to add.

UBS Group 

I took full advantage of December's correction, and added UBS Group (UBS) to my portfolio. The Swiss investment bank has suffered from tough love lately as fears within Europe cause tension over recession potential, the ramifications of Brexit, as well as some up and down earnings through the past five years (though those earnings have been largely profitable). For traders or short term investors, that might be a problem. I'm looking at this one over the long term. At roughly a 5.5% dividend yield, the stock is an excellent source of dividends for reinvestment over the long term. The bank has well over $100 billion in cash/equivalents on the balance sheet and the dividend seems safe.

Short term volatility related to an exit of assets under management in the fourth quarter won't be a long term problem in my view. The move likely stems from the fact that markets simply didn't do that well during the fourth quarter. While this has implications for UBS' fee income over this year, eventually those investors will need someone to manage their funds again. It's a long term dividend play.

Lloyd's Banking Group 

Another 5.5% dividend play, Lloyd's Banking  (LYG)  , might seem like an odd choice considering the UK's current drama over trying to get out of the European Union. Long term, I think the situation creates opportunity. British banks have been absolutely pummeled by Brexit. In some cases, the stock fallout has been well deserved. UK banks don't exactly have the strongest track record. In the case of LYG, I see a bank that has done wonders in streamlining its business back into profitability. The profits aren't huge at present, but the current pricing makes the stock pretty cheap. Lloyd's is well capitalized, and the dividend should be safe.

The banks that have cleaned up their balance sheets since the financial crisis should be okay in the event of an economic downturn. With full year 2018 results coming up on the 20th, I'm curious to see how the bank closed out the year. Year over year, I expect to see earnings growth in line with their trending profitability. It's unlikely that the results will be enough to really spur the stock. The pressures on UK banks from political tensions as well as the low nature of the banks' earnings per share will probably hold the stock at current levels. I'm more interested in the dividend. As long as I see improvement, I feel good about the dividend's safety. Long term, I don't see banks suffering from Brexit. Short term pain will eventually be drowned out by operations moving to different countries.

Medical Properties Trust

Some might get iffy on REIT's in what was a rising rate environment, but it's becoming pretty clear that the Fed is not going to get cavalier on rates. Furthermore, Medical Properties Trust (MPW) operates in the ever strong healthcare sector. Investing in hospitals, clinics, etc., MPW is putting its capital into one of the most recession proof industries in the world. People get sick regardless of economic downturns.

The nature of REIT's tax setup ensures that MPW will always be issuing a fairly nice dividend relative to the share price. The concern then becomes all about revenue/earnings growth. MPW continues to fair well in that regard. Their recently released 4th quarter results demonstrated continued strength in earnings, as well as prudent management in the planned acquisition targets in 2019 to spur expansion. Medical Properties Trust announced plans to purchase 11 hospitals in Australia for $859 million. The acquisitions will then be immediately leased back to the healthcare group MPW is buying them from, Healthscope Ltd. I like the structure, as the company will begin creating returns on its investment quickly. Management iterated that this is the first of many acquisitions that may take place this year.

One might become concerned with debt associated with acquisitions, but if you look at the balance sheet, MPW actually decreased its net debt levels in 2018 by 17.5% to a little over $4 billion. Along with that, the company raised $200 million through stock based financing for its future acquisitions. Total shareholder's equity continues to rise, and the company is sitting on over $820 million in cash at present. The REIT seems well financed to continue its operations.

The company expects full year earnings per share of $1.01 to $1.05 vs. $2.76 in 2018. On an NFFO (normalized funds from operations) basis, the company expects earnings of $1.42-$1.47 vs. $1.37 in 2018. Based on these expectations, the growth story should remain intact this year; even if it's at a slow and steady pace. The reason I haven't jumped on these shares yet is it won't stop climbing. I've been hoping for a pullback entry point, but it's starting to seem like the stock isn't going to give me one.

On a diluted basis, $1.05 per share means the stock is trading at a forward P/E of 17.4. Going off of the normalized earnings projection of $1.42, the stock is trading at a forward P/E of 12.9. That's pretty cheap for a 5.46% dividend. Still, I'd like to see a small correction before jumping in.

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At the time of publication, Dave Butler held positions in UBS and LYG.

TAGS: Earnings | Investing | Markets | Stocks | Trading | Banking | Healthcare

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