There are many methods and strategies for picking profitable stocks. Some investors go for high expected future growth, while others prefer deep intrinsic value with more modest increase predictions. One group of traders love breakout stocks, while others prefer bottom-feeding potential reversals.
So as I looked over a basket of income investing stocks, I realized that some of these could be suitable for deep-value investors looking for a turnaround or technical breakout/momentum plays, while risk-averse income investors trying to maintain stable dividends might shy away from those very same companies.
The targeted goal of this screen is to find companies with decent dividend yields with negative EPS growth expectations over the next five years. Might this screen turn up some companies that are unsuitable for high-quality and safe dividend investing?
- Small-cap or larger
- Dividend yield over 3%
- Negative EPS growth over the next five years
Dividend Stock List
- Brookfield Properties (NYSE:BPO)
- Ship Finance International (NYSE:SFL)
- TransAlta (NYSE:TAC)
- Telefonos de Mexico (NYSE:TMX)
- Vodafone Group (NASDAQ:VOD)
- Windstream (NASDAQ:WIN)
While not a complete list of all stocks, these are six that caught my eye. I also excluded most REITs.
The Dividend Stock List
BPO – There are definitely some good metrics to Brookfield Properties Corporation. It has made an excellent earnings comeback in 2010. Profit margins are overall up when compared to a few years ago, book value per share has more than doubled over the past couple of years, shareholder equity is way up, long term debt is down from two years ago, as are short-term liabilities.
Now for what I am not thrilled about: Revenues are in decline with negative growth that is slightly accelerating over the past few years. Future growth is negative and it was recently downgraded by an analyst. Feb. 11 is the earnings call, so keep a close eye on how the future looks for this one, with much scrutiny on its free cash flow.
SFL – A forward annual yield of 7.2% turns heads with this shipping service. Negative earnings growth is expected to slow and, I assume, turn around at some point. But for this year, next year, and the average for the following five years, the prospects are still chilly, slowing waters. With bleeding revenues and sporadic but declining earnings, this seems to be fairly valued at current prices even with a sub-8 PE ratio, but the future needs to have sunshine before I sail with this stock, big dividend or not.
TAC – Since 2003 revenues have grown with TransAlta, yet the revenue growth rate has slowed from 68% to just below 13%. This stock hopes for 22.7% growth next year, but the five-year forecast is slightly in the negative. PE and price to sales are above industry averages. The overall EPS trend is in a slight slump when looking back over the past three years. When looking at buying, holding, and collecting a 5.5% dividend, you also need to consider the potential for capital loss and a reduction of dividends earnings if they don’t strengthen. An okay pick for now, but little warning signs are jumping up for longer holding periods.
TMX – Declining profit margins, stagnant revenues, and a multi-year drop in net income raise flags on this stock. Earnings continued to disappoint , and the next five years are forecasting negative earnings growth. For me, the 4.4% forward yield is not worth the risk.
VOD – Vodafone provides mobile communications in Europe, Africa, the Asia Pacific, the Middle East, and the United States. It is included in the Nasdaq 100 index. The forward annual dividend yield is 3.1%. On second look, I don’t think this stock deserves to be here. With sub-10 PE ratios, a 45% stake in Verizon (NYSE:VZ) Wireless, and the iPhone hype, make this a stock to seriously consider buying. Another reason to double-check your stock screener for accuracy.
WIN – PE is up, profit margins down. Return on equity is dropping, as long-term debts and liabilities rise. Free cash flow is trending sideways(if not slightly down) over the past five or six years. WIN has been plagued with negative earnings surprises the last many quarters, and although some growth next year is expected, the next five years are down. The PE and price to sales are both above industry standards. While this might go up somewhat with the overall industry and have a high 7.7%, keep a close eye on eroding fundamentals if you choose to trade off a measure of risk for a higher dividend yield.
Concluding Remarks and Due Diligence Needed
Again, let me reiterate that many of these stocks could be excellent buys when considering them from different strategic viewpoints. With this article, I wanted to see which of these dividend yielding stocks are most suitable for low-risk holdings with a five-year forecasted earnings gain. But do your homework, as these are just some opening statements on the above stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.