5 Dividend Stocks Owned By Smart Investors

Includes: BMY, EPD, NOK, ORI, RIG
by: Investment Underground

by Michael Acebo

Dividend stocks are good insurance against volatility. Today we're looking at a list of 5 dividend stocks that we think will provide both capital appreciation and dividend growth to investors. No wonder these stocks are also owned by guru investors like Prem Watsa, George Soros, John Paulson and Irving Kahn.

Bristol Myers Squibb Co. (NYSE:BMY)

BMY is one of the outperformers among pharmaceutical stocks. The company has gained 10.25% for the year. This is higher than other leading pharmaceutical stocks. For example, Pfizer Inc. (NYSE:PFE) and Merck & Co. (NYSE:MRK) returned +4.25% and -11.58%, respectively. The reason BMY's share have shot up? The company has performed better than expected. Last July, it has raised its full year earnings to $2.20 to $2.30 a share. This suggests a price earnings multiple of 13.84 to 14.47 times. As expected, this multiple is higher than PFE and MRK. Both stocks carry an earnings multiple of only 8 times. But this is in line with BMY’s historical earnings multiple of 14 to 23 times.

Dividend yields are almost all in line at more than 4%. The company has slightly grown its revenues by 2.87% over the last 5 years. The dividend payout ratio is at 80%. That being said, we think investors should expect higher dividends in the future. The company has been acquiring smaller specialty pharmaceutical companies to boost its earnings. The stock has been downgraded by analysts recently. Its target price is pegged at $31.04, which implies that the stock is trading at fair values. However, it’s good to know that Dr. John Hussman owns this stock.

Old Republic International Corp. (NYSE:ORI)

Old Republic International Corp. is a single business insurance underwriter. It operates under property and liability insurance, mortgage guaranty and title insurance. Mortgage guaranty insurance provides around 40-50% of the company's revenues. This is precisely the reason why the market is pricing ORI soley as a mortgage insurer. The whole group has been badly beaten by the market. ORI declined 32% this year. Mortgage default rates have increased and pundits are not sure if the bottom has been reached. The silver lining is that ORI has more diversified sources of revenues than other mortgage insurers. MGIC Investment Group (NYSE:MTG) and Radian Group Inc. (NYSE:RDN) are concentrated on the mortgage guaranty business.

The stock is valued at 23 times next year’s earnings and provides a 7.60% dividend yield. This is higher than MTG’s 8 times earnings, while RDN is expected to post a loss next year. ORI is also beefing up its other businesses. Last year, it acquired PMA Capital to have a better position in property and liability insurance. Analysts rate ORI a buy and target price of $14.25, more than 50% from the current levels. Guru investors Prem Watsa and Irving Kahn own this stock.

Nokia Corp. ADR (NYSE:NOK)

Shares of Nokia Corp. traded above $50 during the height of the technology bubble. Since the debut of Android and Apple (NASDAQ:AAPL) smartphones, the company has slowly lost its market share. At present, it commands less than 2% of the market. For the year, shares have declined by 42%. Recently, its CEO Stephen Elop wrote an open letter to Nokia employees where he acknowledged the leadership of Apple and Android smartphones. He also announced that Nokia will partner with Microsoft (NASDAQ:MSFT) for a Nokia Windows Phone 7. Time will tell whether this strategy will work for Nokia.

At present, the stock is valued at 16 times next year’s earnings and has a 8.10% dividend yield. This is higher than Motorola Solutions, Inc. (NYSE:MSI) and Research in Motion Ltd. (RIMM) valuations. MSI trades at 14 times earnings and has 2.80% dividend yield, and RIMM trades at 5 times earnings. The current levels of earnings appear depressed, and we think the company could earn as much as $0.80. At that level, the stock would trade at 7 times earnings. Investors will have income from dividends and the upside that the company could reemerge as a smartphone leader. Legendary investors George Soros and Dodge & Cox have Nokia Corp. in their portfolios.

Enterprise Products Partners LP (NYSE:EPD)

Enterprise Products Partners is a master limited partnership that has exposure to natural gas and other petro chemicals. It currently has a wide array of natural gas liquid assets. If and when the price of natural gas goes back to pre-crisis levels, expect a huge jump in profitability and dividend distributions. The stock has declined by 3.67% for the year. The stock’s resilience is attributed to its low correlation to the market. The stock is trading at 19.20 times next year’s earnings and has dividend yield of 5.90%. Management has been able to grow its dividends by 6.88% over the last 5 years.

In contrast, Kinder Morgan Energy Partners (NYSE:KMP) trades at 28 times earnings and 6.70% dividend yield. The key advantage is that EPD has a lower payout ratio than KMP. This leaves a lot of cash to EPD management to reinvest into more profitable ventures. Chuck Akre and Mario Gabelli have EPD in their funds.

TransOcean Limited (NYSE:RIG)

TransOcean Limited is a provider of contract offshore drilling services. The company has interest in 138 mobile offshore units and operates 47 high specific floaters, 25 midwater floaters, 9 high-specific jackups, 54 standard jackups and three rigs. The company has healthy project backlogs of $25 billion, which provides good earnings visibility moving forward. Shares of RIG have been beaten down by 23% for the year as oil prices have been trading below $100. However, we believe that the long-term fundamentals of RIG and oil prices remain intact. This may provide good opportunities for investors.

The current price of around $54 a share suggests an earnings multiple of 9.17 times next year’s earnings. The stock also carries a dividend yield of 5.80%. This is higher than Noble Corp. (NYSE:NE) valuation of 8.78 times earnings and 1.50% dividend yield but lower than Diamond Offshore (NYSE:DO). DO has a dividend yield of 8.78% and trades at 12 times earnings. The stock has been upgraded to buy with a target price of $75.10 a share. At the current levels, the implied upside is around 38%. The near term catalyst would be higher oil prices, which could move the stock back to $90’s. Leon Copperman and John Paulson own this stock.

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