17 Stocks to Smooth the Bumpy Road Ahead

As a follow-up to my earlier post on John Mauldin’s guest commentary feature, I decided to run a scan through Hillbent’s Market Direction Monitor for stocks trading at forward P/E ratios less than their current dividend yields, in an effort to discover some reasonable equity market values.

Like John Mauldin, I tend to agree that a 6% dividend yield covers a lot of market sins, so a minimum required yield is 6%. However, from this point forward, I include some of my own risk management parameters:

1) Sustainability of the dividend is paramount and, therefore, I require a payout ratio of 50% or less. Essentially, this means that a company’s net earnings is at least twice as much as the dividend it pays out to its shareholders.

2) As a professional money manager, I generally am less forgiving when it comes to liquidity. However, as this screen is tailored more towards a "buy and hold" type strategy, I have lowered the average daily liquidity requirement to 100k shares.

3) Last, since this screen is somewhat contrarian in terms of investor sentiment, I am screening only for stocks with Hillbent’s proprietary composite grade rating of "C". ("A" is strongest and "E" is weakest in terms of the fundamental outlook for a stock’s revenue and earnings stability.) Essentially, a "C" in Hillbent’s universe translates into a "hold" rating. I am neither "hot" nor "cold" on these names.

The results produced 17 names (see table below) from Hillbent’s 3000 universe (i.e., average daily volume of 100k and top 3000 in market capitalization).

In exchange for owning stocks apparently stuck in neutral, the contrarian investor gets paid a minimum yield of 6% or an average yield of 12.51% if he/she buys an equally weighted portfolio of these securities. Assuming that economic conditions do not devolve from a state of worse to worser or worst, an investment in these compounding dividends might be just the vehicle to smooth the bumpy roads ahead in this recession.

(Note that the purpose of this report is not to provide specific recommendations, but instead serve as a starting point for investment ideas. It is strongly recommended that you do your own homework and due diligence research analysis.)

Disclosures: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[whisperonth...:]

No such word as "worser"... that being said, I'll take a look at these stocks and consider rounding out my dividend-based portfolio.

Jan 05 09:15 AM

[Richard Col...:]

Very good. We need more positive thinking and yes you must do your own research as J Clinton Hill says as this is just a guide, but a very good guide.

Dan Kowkabany

Jan 05 10:32 AM

[Ricard:]

I hold EXM. Amazing how much shippers have been pummeled. When I bought this, it had a P/E of less than 1. That 20% dividend is not a joke.

Jan 05 10:53 AM

[axelrod608:]

The trouble with setting parameters and running a computer sort is you don't know WHY you get the results. MNI for example had a huge div based on a gain of sale. They are up 40+% today, hopefully not based on this article.

Also, by using an earnings/div factor, you eliminate all royalties and MLP's that are required by law to pay a higher % in divs. When I bought HTE a while back, the yield was 40+%.

Truly, one needs to give this list - and others similarly generated - due diligence before buying in.

Jan 05 12:31 PM

[henarl:]

Good article - good info.

Jan 05 12:36 PM

[John Lounsbury:]

Axelrod - - -

Your comments are apropos. All screening programs come up with lists that then require individual examination of strengths and weaknesses. Also, regarding you MLP comment, many different screens should be run to avoid the problem you pointed out.

Jan 05 02:33 PM

[Old Trader:]

Only a minor quibble, pertaining to sustainable dividends. While that's rightly a justifiable concern, I see EXM and NM on the list. While I presently don't own any shipping stocks, I've been following the sector for a while (those yields ARE quite tempting), and most (all?) of the companies in the sector have lumpy earnings (resulting in lumpy dividends), which could prove to be problematic for an investor constructing a portfolio from which he/she plans to "live off the dividends".

Jan 05 09:19 PM

[granger:]

Thanks for the ideas. I will take a gander.

Jan 06 03:13 AM

[Eze.:]

A good piece of work put together, but a bad English ( worser) really put some question mark on the integrity of the writer. All the same, your research is okay.

Jan 17 07:45 AM