The market's recent sell-off has presented a number of great buying opportunities. While some investors are panicking because of the possibility of higher interest rates and rising geopolitical tensions across the world, long-term investors such as myself understand the value of holding a long-term vision. As Baron Rothschild has famously quipped, the best time to buy is often when there is blood in the streets.
There certainly seems to be blood in the streets right now. The markets have finally presented a buying opportunity, and I'm not waiting on the sidelines any longer. As a dividend investor, I'm not scared of declining markets. Quite the opposite, I love the idea of picking up cheap stocks at higher dividend yields.
With that in mind, here are two high-yield dividend stocks with compelling valuations that I recently added to my portfolio.
Placing my bets on agriculture
I believe in the long-term economics of the agriculture industry. The world's population continues to grow, and as underdeveloped nations grow, millions and millions of people across the globe are entering the middle class as we speak. That places an enormous strain on food production, which means productivity of farmland is a key issue going forward.
With that in mind, I recently picked up shares of two agriculture-based companies. The first is construction equipment maker Deere & Company (NYSE:DE). I've been following Deere for several months now and last wrote about the stock here, waiting for an opportunistic sell-off to take advantage of, and I finally got it. Investors appear scared because Deere turned in a poor third quarter. Total revenue dropped 5% year-over-year to $9.5 billion. Earnings per share declined 9% to $2.33 per share. Equipment sales fell 6% year-over-year. The key culprit was the agriculture and turn division, where net sales fell 11%.
This should not have come as a surprise, however. Farming is weak right now, as corn prices have slumped greatly over the past several months. That being said, Deere maintains a bright long-term vision because of the inevitable need for food. Deere sees strong growth in several emerging markets, such as China and India, which will help fuel future growth.
The other agriculture stock I added to my portfolio is fertilizer producer Terra Nitrogen Co. LP (TNH). Terra Nitrogen is a company I last wrote about here. I like this company because it's currently on a cyclical downturn. Last year's harvest season was poor due to cold weather that harmed the application period. This is affecting this year's results. Earnings dropped 33% last quarter due to lower ammonia prices and higher natural gas costs. But farmers need fertilizer, and there will always be a need for food. With a better harvest season this year, Terra Nitrogen's results should improve.
Long-term growth thesis
The world's population continues to expand, and since there's only so much farmland available for food production, this places an enormous strain on farm yields and productivity. Crop nutrient supplier Mosaic (MOS) stated in its 2013 annual report that the global population recently passed 7 billion and will reach 9 billion by 2050. And, that farmers will have to grow as much food over the next 50 years as they have over the full course of recorded human history.
Deere's highly productive machines are critical to feeding the world, and as a result, the company is seeing positive momentum across many of its key markets. In China, government subsidies will support the agriculture industry. Deere expects 7.3% growth in China's GDP this year, which is a strong tailwind. And, in India, where the government is focusing on mechanization, Deere's equipment should fill the demand.
In the United States, Deere is seeing farming conditions firm. Farm cash receipts in the U.S. are still very close to historically high levels. Separately, housing starts and construction spending are still recovering in the United States, which should provide growth for Deere's construction and forestry segments.
Terra Nitrogen could also see higher demand for this year's application season since its parent company CF Industries (CF) reported record ammonia sales last quarter. This could mean a much better harvest is in store, which would be a huge tailwind for Terra Nitrogen.
Deere and Terra Nitrogen are both value and income plays
What attracts me most to Deere and Terra Nitrogen is that they are both value and income plays. Each company has remained solidly profitable despite their falling share prices, and their dividends have remained intact.
Deere is a cheap stock and pays a solid 3% dividend. Deere's valuation is attractive because the stock trades for 9 times trailing EPS and 12 times forward EPS, meaning the market is already pricing in Deere's lack of growth expectations. Once farming conditions improve again, Deere should rebound, and its valuation will likely expand. Plus, Deere is a strong dividend growth stock. Earlier this year, Deere raised its dividend by 17.6%. Deere raises its dividend every five quarters on average. Over the past five years, the compound annual growth rate of its dividend is a very strong 16.5%.
Terra Nitrogen units have fallen significantly to $139 per unit, and are down about 34% from their 52-week high of $211 per unit. Terra Nitrogen has a very cheap valuation, and is now a great value and income play. The units trade for just 10 times EPS and offer a nearly 9% yield. Plus, Terra Nitrogen has a strong balance sheet, which provides some protection. The company has $116 million in cash and equivalents, compared to virtually no long-term debt.
Both Deere and Terra Nitrogen are suffering through downturns, which has brought their valuations down as well. However, I'm not focusing on what has gone wrong through the first part of the year. Rather, I'm keeping my focus on what I believe will happen going forward. I expect the global agriculture industry to rebound due to the fact that food production is simply something we cannot live without.
Assuming some recovery in their respective businesses, it's extremely likely that Deere and Terra Nitrogen will see their valuations expand in the future. Add in their hefty yields, and the total return potential for Deere and Terra Nitrogen over the next several years is very compelling. That's why I bought both Deere and Terra Nitrogen, and why my fellow value and income investors should do the same.
