Income Investors: 7 Dividend Kings Now on Sale

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 |  Includes: AGNC, CIM, CTL, FTR, MO, NLY, WIN
by: Vatalyst

With interest rates so low, investors may want to turn to the equity markets where dividends can give higher returns than bank deposits, and the opportunity of capital growth on top. We looked at 7 dividend kings that income investors might like to consider in the midst of the recent turmoil:

Windstream Corporation (NASDAQ:WIN): The company operates as a telecommunications services provider across the rural United States, serving individuals and businesses. Shares are trading at $10.81 the bottom of its 52-week trading range of $10.76 to $14.40. At the current market price, the company is capitalized at $5.51 billion. Earnings per share for the last fiscal year were $0.55, placing the shares on a P/E ratio of 19.65. It paid a dividend of $1.00 last year (a yield of 8.60%) which was covered 0.55 times by its earnings. Earnings are expected to increase through the next couple of years, hitting $0.77 this year, and then rising to $0.87 the following year.

The company’s cash position is winding down, and it may find it hard to continue its dividend policy, which has seen it increase the dividend for 14 consecutive years. However, at current share price levels if it did need to shave the dividend, it would still be a healthy payer. With shares heading toward 52 week lows, the stock is a hold for those that already own, but not yet a buy until the future becomes more certain.

CenturyLink Inc (NYSE:CTL): An integrated communications company, CenturyLink provides services from voice to internet and other data services, as well as leasing , sales and installation. At the end of 2010, it had approximately 7 million access lines. Shares are trading at $31.82 at the time of writing, at the bottom end of its 52-week trading range of $31.75 to $46.87. At the current market price, the company is capitalized at $19.06 billion. Earnings per share for the last fiscal year were $2.03, placing the shares on a P/E ratio of 15.70. It paid a dividend of $2.90 last year (a yield of 8.60%) which was covered 0.70 times by its earnings.

The company holds cash of $2.55 billion, which will support dividends, and interest payments on its debt. CenturLink has increased it dividend for 37 consecutive years, and with good growth prospects, it is well placed to continue to do so. The average 12-month target price for the shares amongst analysts that research the company is $56. Well positioned for capital growth, as well as dividend growth.

Altria Group (NYSE:MO): A manufacturer of tobacco and related products, Altria sells its products around the world. Shares are trading at $24.54 at the time of writing, toward the low end of its 52-week trading range of $22.15 to $28.13. At the current market price, the company is capitalized at $50.83 billion. Earnings per share for the last fiscal year were $1.64, placing the shares on a price to earnings ratio of 14.95. It paid a dividend of $1.52 last year (a yield of 5.90%) which was covered 1.08 times by its earnings. These earnings are expected to rise through the next couple of years, hitting $2.04 this year, and then rising to $2.18 the following year.

We see the dividend rising in line with earnings, continuing an unbroken run of 45 years of dividend increases. If its average dividend payout of 92% is reverted to, then the dividend should be around $2.00 in two years. Given that MO is rated by the market on its dividend, if the yield ratio is to remain the same as today (5.90%), then a dividend of $2.00 would support a share price of $33.99.

American Capital Agency Corp (NASDAQ:AGNC): A REIT (Real Estate Investment Trust), the company invests its funds mostly in short-term borrowings structured as repurchase agreements. Shares are trading at $29.78 at the time of writing, toward the top end of its 52-week trading range of $22.03 to $30.76. At the current market price, the company is capitalized at $5.32 billion. Earnings per share for the last fiscal year were $6.54, placing the shares on a P/E ratio of 4.56. It paid a dividend of $5.60 last year (a yield of 21%) which was covered 1.17 times by its earnings.

Revenue during the next two years is expected to double to $176.98 billion. If revenues match up to estimates, then dividend growth over the next two years should be explosive. REIT’s pass on much of its earnings as dividends (by law, this should be 90% of its earnings, paid out by way of dividends). For investors who are comfortable with a company that makes money from collateralized mortgage obligations, then the shares look a good buy.

Chimera Investment Corp (NYSE:CIM): A REIT, that invests in residential mortgage backed securities, which targets prime, jumbo prime and Alt A mortgage loans. It distributes 90% of its REIT income to its shareholders through dividends. Shares are trading at $2.91 at the time of writing, toward the bottom end of its 52-week trading range of $2.62 to $4.36. At the current market price, the company is capitalized at $52.98 billion. Earnings per share for the last fiscal year were $0.58, placing the shares on a price to earnings ratio of 5.03. It paid a dividend of $0.52 last year (a yield of 17.30%) which was covered 1.12 times by its earnings.

These earnings are expected to remain constant through the next couple of years, hitting $0.58 this year, and then easing to $0.54 the following year as revenue falls slightly to $702.18 million. Though the dividend should be secure, and stay consistent with the terms of a REIT’s payout, the prospects for growth of the dividend are negligible to zero. However, for investors seeking more constant pay-outs, with little prospect of a surprise on the share price upside or downside, Chimera presents such an opportunity.

Frontier Communications Corp (NASDAQ:FTR): Providing voice, data and video services to businesses and residential customers. Its customers are United States based. Shares are trading at $6.62 at the time of writing, having bounced from the bottom of its 52-week trading range of $6.29 to $9.84. At the current market price, the company is capitalized at $6.55 billion. Earnings per share for the last fiscal year were $0.16, placing the shares on a price to earnings ratio of 41.12. It paid a dividend of $0.75 last year (a yield of 11.10%). These earnings are expected to rise through the next couple of years, hitting $0.26 this year, and then rising to $0.31 the following year.

The company has cash reserves of $225 million, but these are being eroded by its dividend payments. This erosion is likely to continue if the company maintains its dividend. Although analysts’ estimates for the share price average $8.75 as a target for 12 months, it is difficult to see how its growth prospects merit this. In Frontier’s case, there is a reason its share price produces a high dividend yield. Without real earnings growth, at some stage the dividend will have to be pared. Not an attractive enough prospect for new buyers.

Annaly Capital Management Inc (NYSE:NLY): Shares are trading at $17.86 at the time of writing, in the middle of its 52-week trading range of $14.05 to $18.79. At the current market price, this REIT is capitalized at $14.84 billion. Earnings per share for the last fiscal year were $2.69, placing the shares on a P/E ratio of 6.64. It paid a dividend of $2.60 last year (a yield of 15.90%) which was covered 1.03 times by its earnings. These earnings are expected to dip through the next couple of years, hitting $2.62 this year, and than easing to $2.54 the following year. Though the dividend should be secure, the company may find it difficult to justify an increase over this period.

The company, as a REIT, is obliged to pay 90% of its REIT income as dividends to shareholders. This sounds attractive. For those investors looking for a steady income stream, the shares provide an attractive solution. Capital should remain intact, whilst dividends yielding around 16% are collected. However, for those investors that are worried by collateralized mortgage debt, it may be a purchase too far.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.