Concerns over "tapering" in September by the Federal Reserve has taken the wind out of many higher-yielding dividend stocks. This appears to have created a solid buying opportunity as some stocks are now trading at the low end of the recent trading range, or what I like to call the "buy zone." When stocks are still in an uptrend and yet have pulled back to the lower end of the trading range, this can create an ideal buying opportunity. Stocks often find support at these key levels, which can mean that additional downside risks are possibly limited. Here are two higher-yielding stocks that appear to still be in a longer-term uptrend and yet are now offering investors an ideal entry point due to a short-term pullback:
Helios High Income Fund, Inc. (NYSE:HIH) is a closed-end fund or "CEF" that invests in high-yield bonds. This fund is managed by Brookfield Investment Management, a leading investment firm with over $175 billion in assets under management. This fund offers a monthly dividend payment, which yields over 9%, plus it trades at a significant discount to net asset value and it has a portfolio with a limited duration. As I mentioned in a recent article, Barron's is also suggesting that "savvy" investors consider some of the bargains in the closed-end fund sector, and this is one more reason to consider this type of investment.
This fund pays a monthly dividend of 6 cents per share, and this provides a yield of over 9%. Historically, this fund has traded at a small discount to the net asset value. However, a recent sell-off in the bond market has created a buying opportunity as it now trades at a 10.3% discount to net asset value.
As the chart above shows, there is a historically wide divergence
between the share price and the net asset value. The net asset value
(as indicated by the green trend line) has already started to rebound,
yet the share price (as indicated by the orange trend line), is still
at bargain levels and at a historically wide discount to the net asset
value. The last time this fund had a significant sell-off below net
asset value was back in November. That turned out to be a prime
buying opportunity as the share price rebounded and traded back near
net asset value within weeks. If history repeats, the share price
could be headed up to $8.84, which is the net asset value as of August
As the chart above shows, this stock has been in an uptrend during 2013. However, a recent and sharp pullback has put these shares back in the "buy zone" (otherwise known as the low end of the recent trading range), which is just above the light blue uptrend line. This blue trend line shows that this stock has had strong support near these levels in the past and it has paid off to buy in this area, as the stock has rebounded in the past.
Potential downside risks to consider when investing in bonds is duration. Investors who own long-term bonds that mature in 20 or 30 years could be significantly impacted if rates rise substantially from current levels. However, the average duration for the Helios High Income Fund is just 4.2 years, which means duration risk is very limited. Another potential downside risk is liquidity. Closed-end funds can trade at a discount or a premium depending on supply and demand. That means you could get less than the underlying assets are actually worth, or more depending on when you buy or sell. However, savvy investors who buy closed-end funds at a discount after pullbacks can take advantage of the market volatility and then consider selling when the share price has rebounded close to net asset value.
The Helios High Income Fund has returned 12.08% annually for the past 3 years, and 10% annually over the past 5 years. With a monthly payout that yields over 9%, a short duration portfolio and with the shares trading 10% below net asset value, this fund makes sense for investors seeking capital gains potential and a very high yield.
Investors who buy this fund soon will be eligible to receive a dividend very shortly. This fund will pay the next monthly dividend of 6 cents per share to shareholders of record on August 15, 2013. The ex dividend date is August 13, 2013, and the dividend will be paid on August 30.
Here are some key points for HIH:
Current share price: $7.92
The 52-week range is $7.58 to $9.04
Earnings estimates for 2013: not applicable
Earnings estimates for 2014: not applicable
Annual dividend: 72 cents per share (or 6 cents per month), which yields 9.1%
Altria Group, Inc. (NYSE:MO) shares were hitting new 52-week highs just weeks ago at about $37.50. However, a recent pullback to around $35, has brought this stock back to an ideal level for income investors.
As the chart shows, this stock has been in a solid uptrend for this year. Investors who have been buying on dips have been rewarded over the past several months and this trend could be poised to continue. The stock is now at the low end of the trading range (as indicated by the light blue trend line), and yet it is still in an uptrend. This is why I consider this stock to be in the "buy zone." Since it is still in an uptrend, and also at key support levels shown by the blue trend line, there might be limited downside and the stock could be poised to continue trending higher.
Altria manufactures globally recognized cigarette brands such as Marlboro, Virginia Slims, Parliament, Benson & Hedges. It also owns some very popular wine brands including: Chateau Ste. Michelle, Columbia Crest, and many others. These product lines are a mixed blessing in my opinion. On one hand, wine and cigarettes are steady sources of revenues, although the growth rates are not tremendous. Furthermore, tobacco companies have seen lawsuits frequently arise and this is a downside risk to consider. Another potential downside is that more people have become aware of the hazards of smoking in many developed countries. However, some of this has been offset by growth in emerging market countries.
This stock offers a generous yield of nearly 5%, which makes it ideal for income investors to consider. Altria also has a history of dividend growth. For example, in June, 2008, the dividend was 29 cents per quarter, but now the dividend is 44 cents per quarter, which represents an increase of roughly 50%.
The recent pullback to the low-end of the recent trading range puts Altria shares at attractive levels, especially with a yield of about 5%, and a history of dividend growth. The valuation also appears reasonable at just about 14 times earnings, while the S&P 500 Index (NYSEARCA:SPY) currently trades for about 16 times earnings. These are additional reasons as to why this stock appears to be in the "buy zone" now.
Here are some key points for MO:
Current share price: $35.75
The 52-week range is $30.01 to $37.61
Earnings estimates for 2013: $2.39 per share
Earnings estimates for 2014: $2.56 per share
Annual dividend: $1.76 per share, which yields 4.9%
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclosure: I am long HIH, MO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: 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.