We are now about 7 days into the budget impasse and over the weekend investors were reminded that the U.S. debt ceiling will be reached around October 17. At this point, the market is trading primarily on both hope and pessimism for a deal on this impasse. Republicans want some concessions and yet President Obama says there will be no negotiations even though both President Clinton and President Reagan "negotiated" in the past, on this issue.
The stock market is starting to come under pressure as the rhetoric increases and as each day goes by without a deal. It seems extremely unlikely for the U.S. to get to a worst-case scenario in which it defaults on its debt. The most likely outcome is that a deal will eventually be reached and that this will spark a major "relief" and short-covering rally in the markets.
While President Obama seems fairly steadfast in his "no negotiations" position, he also seemed to take a similarly strong position on Syria if it were to cross a "red line". Now we know that was not the case, and many in the world take the view that Obama "blinked" when it came to the crisis in Syria. The same will probably happen soon on the current debt and budget crisis. Furthermore, Republicans also don't want to be blamed for causing a crisis. It seems that both sides will need to give a little, in order to save the global financial markets from a lot of pain.
For now, investors should take advantage of the rhetoric, and political posturing and buy stocks that make sense for the long term. With U.S. Treasury Secretary Jack Lew suggesting that the debt ceiling will be reached on October 17, we are only about 10 days away from that date. I believe a solution will be found before that date, and that a deal will spark a major relief rally. That means investors may only have a few days left to start buying stocks while the markets are still under pressure from this budget impasse. Furthermore, this crisis is probably enough to postpone the potential for "tapering" by the Federal Reserve until sometime next year. The combination of no tapering and a deal on the budget could not only spark a major rally, but it could also provide smooth sailing for the rest of the year for the stock market.
If you agree that a deal will be reached, it makes sense to be buying. The risk is that you don't want to buy too much or too early. Because of this, it makes sense to buy stocks in stages and average in over the next few days. I believe it also makes sense to buy stocks that offer solid yields, and an even better strategy would be to focus on stocks that will pay another dividend fairly soon. This will help to limit potential downside risks, and still keep your portfolio on track for the long term.
For example, Arbor Realty Trust, Inc. (ABR) shares were recently trading for over $7, but the sell-off has created an ideal buying opportunity. The shares of this real estate investment trust "REIT", (which is focused on investing in multifamily, commercial real estate-related bridge and mezzanine loans) is now below $7, which looks cheap as the book value is $7.60. It also looks undervalued as it offers a yield of about 7.8%. Furthermore, the 13 cent per share quarterly dividend was last paid on August 12, which means the next quarterly dividend should be paid in just about 4 weeks, in early November.
Analysts at Deutsche Bank have given this stock a buy rating and set a $9.50 price target. Investors using the current market weakness to buy now could be poised for a generous yield of about 7.8%, an upcoming dividend payment, plus significant upside potential if the stock hits the $9.50 price target. In addition, the current budget impasse appears to have no significant or direct impact on the business model or financial results for Arbor Realty, which is just one more reason to be accumulating this stock before it rebounds. Finally, Billionaire investor Leon Cooperman named Arbor Realty as one of his top picks for high income with growth for 2013, at the Delivering Alpha Conference. With his very strong investment track record, investors should consider following his lead into this high-yielding stock.
Here are some key points for ABR:
Current share price: $6.70
The 52-week range is $4.72 to $8.60
Earnings estimates for 2013: 57 cents per share
Earnings estimates for 2014: 64 cents per share
Annual dividend: 52 cents per share, which yields 7.8%
Altria Group, Inc. (MO) is another high-yielding stock to consider now. It was trading near $36 in September, but now it is trading around $34 per share. Many investors think of this company as a leader in the tobacco industry since it owns brands like Marlboro, Virginia Slims, Parliament and Benson & Hedges. However, it has a significant portfolio of wine brands which include: Chateau Ste. Michelle, Columbia Crest, and many others.
It is unlikely that consumers around the world will consume less wine or cut back on smoking because of the budget impasse, so the sell-off in the stock appears to be another buying opportunity. Altria shares could rebound sharply because it yields a mouth-watering 5.5% while the average stock in the S&P 500 Index (SPY) yields just around 2%. Altria just recently raised the quarterly dividend by 9.1% to 48 cents per share. Furthermore, it has increased its dividend 47 times in the last 44 years.
In addition, Altria also recently announced that it would expand on its share buyback plan from the current plans of $300 million. It has nearly tripled as the company now plans to buy back $1 billion worth of stock. While the company may not see much growth for tobacco products in the U.S., there is certainly growth in the emerging markets and for its wine products. With a generous and ever rising dividend yield, globally recognized brands and a stock buyback program, this stock is worth considering now.
Here are some key points for MO:
Current share price: $34.65
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: $1.92 per share, which yields 5.5%
AT&T (T) shares were trading around $35 in September, but thanks to a recent pullback, it now trades for just over $33. AT&T is one of the world's largest telecommunication companies and its business model does not appear to be impacted by the political standoff in Washington. People and businesses are still going to buy phones, make calls, and send text messages, so buying this high-yielder on dips, makes plenty of sense.
This company offers a dividend yield of about 5.3% and it has a significant share buyback program in place. Earlier this year, AT&T authorized the repurchase of up to 300 million additional shares, (with no expiration date) and this represents approximately 5.5% of AT&T common shares outstanding. This is in addition to two other 300 million share repurchase authorizations approved by the board of directors in December 2010 and July 2012. (Although the company completed repurchases under the December 2010 share authorization last year). AT&T has repurchased 539 million of its shares, or approximately 9% of shares outstanding since 2012. Share buybacks reduce the number of shares outstanding and this can boost earnings per share and the potential for future dividend increases.
AT&T also has a history of raising the dividend. In 2002, the quarterly dividend was 27 cents per share, but due to increases, it now pays 45 cents per share on a quarterly basis. This represents an increase of about 65% over the past 11 years, and with a strong balance sheet, revenue growth, and share buybacks, the dividend is poised for increases in the future.
Here are some key points for AT&T:
Current share price: $33.75
The 52-week range is $32.71 to $39
Earnings estimates for fiscal year 2013: $2.49 per share
Earnings estimates for fiscal year 2014: $2.69 per share
Annual dividend: $1.80 per share, which yields about 5.3%
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.