While some people are getting ready to take advantage of "Black Friday" sales at the local mall, there could be even better deals in the stock market and you won't even have to wait in line or deal with crowds. It's a funny thing with getting a bargain on a stock when compared to buying a book, TV, or a sweater that is on sale, because while people might line up to get some merchandise for 20% off at a store, investors are often hesitant to buy a stock that just declined by the same amount or more.
But buying a cheap stock that offers higher than average dividends can reward you handsomely now and keep paying you for years with a solid income stream. Rather than save a few dollars at a store on "Black Friday", it might make more sense to consider these dividend stock "specials":
American Capital Agency (AGNC) shares were trading for around $35 in October, but the past few weeks have been tough on mortgage REIT stocks for a couple of reasons. First there was a drop of about 5% for most of the stock market indexes right after the election. That caused many stocks to drop, especially dividend-payers since the lack of a deal on the "fiscal cliff" could cause the tax rate on dividends to jump from 15% to nearly 43%.
Another issue has been sector-specific to mortgage REIT companies like American Capital Agency. As a result of the Federal Reserve launching QE3, interest rates have dropped and that has caused a new wave of mortgage refinancing. When loans are paid off early and replaced with ones at lower rates, it impacts the profit margins for mortgage REIT companies and some have found it necessary to lower the dividend rate in order to adjust to the new interest rate dynamics.
However, there is also a benefit to this industry from QE3 which is that very low rates are likely to continue for at least a couple more years. Many mortgage REIT companies borrow money and re-invest the funds into higher yielding assets. QE3 has pushed down borrowing rates for mortgage REIT companies as well as homeowners so the market might be somewhat overreacting to margin pressures.
One sign that the selloff is overdone and that the dividend is possibly sustainable around current levels, is a new round of insider buying. On November 13, Samuel Allan Flax (an officer) purchased 2,000 shares, in a transaction valued at $59,500 and a day earlier, he bought 2,950 shares in a deal worth $90,830. The shares also appear undervalued when looking at book value which as of September 30, 2012, was $32.49 per share. While some mortgage prepayment risk remains, investors should consider that some, if not all of this might already be reflected in the stock price.
By taking a longer-term view it is easy to see that over time, this company could be poised to provide above-average returns. For example, investors who keep cash in "safe" savings or money market accounts might earn a total of about 1% over the next three years, and maybe almost 2% over the next five years. However, investors in this stock could earn 40% plus in the next three years and over 50% in the next five years, just from the dividend yield. That is why picking up shares of this high yielder on dips could continue to work for income investors.
Here are some key points for AGNC:
Current share price: $31
The 52 week range is $27.61 to $36.77
Earnings estimates for 2012: $4.02
Earnings estimates for 2013: $5.47
Annual dividend: $5 per share which yields about 15.3%
Intel Corporation (INTC) shares have been hit hard in the latest market correction. Furthermore, many investors are concerned about PC growth because recently it has been lackluster due to the popularity of tablets like the iPad. There seems to be no doubt that the PC industry is in transition and many companies are in the process of redefining future strategies.
While some investors have faulted Intel for being slow to develop a leading edge in the mobile device market, it has redoubled efforts in this area and it has a sizeable research and development budget which means that it has the resources to play "catch-up" if it needs to do so. Some investors were also recently disappointed to learn that Intel CEO, Paul Otellini has decided to leave the company around May 2013, after many years at the company.
Most investors would prefer to see management stability especially at a time of transition for the PC industry, and the stock drifted lower on this news. However, new management could be a good thing and there are a number of highly qualified candidates for the position.
Intel shares were trading around $26 in August, but now trade close to $19 due to the near perfect storm in recent weeks which includes the market correction, PC industry concerns and the CEO departure news. This is why Intel share are so cheap now and offer a yield that is approaching 5%. This is why investors might want to consider Intel as a "Black Friday" stock bargain, especially since many PCs are likely to be sold this holiday season with "Intel Inside".Intel shares trade for just about 9 times earnings which is well below the market average of about 14 times earnings for the S&P 500 Index (SPY).
Intel makes sense for income investors because of the yield it offers, plus it has a history of raising the dividend. For example, in 2009, the quarterly dividend was 14 cents per share, but today it is 22.5 cents. The above average yield, below market P/E ratio, solid balance sheet and history of dividend growth makes Intel a solid candidate for income investors.
Here are some key points for INTC:
Current share price: $19.36
The 52 week range is $19.23 to $29.27
Earnings estimates for 2012: $2.11 per share
Earnings estimates for 2013: $1.96 per share
Annual dividend: 90 cents per share which yields 4.6%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.