A Dividend Stock Yielding 14% That Annaly Shareholders Could Love

| About: Orange (ORAN)

We all have heard stories about how some investor made a killing after buying shares in a stock that had dropped to bargain levels, and we all want to be that investor next time around. However, the toughest thing for some investors to do is buy into anything after seeing others lose so much money.

As a self-defense mechanism, the human mind is wired to avoid putting ourselves in a situation where we see others getting hurt. In this case, we have all either seen ourselves or other get hurt financially in the stock market, and as the European debt issues brings memories of the 2008 financial crisis to the forefront of our minds, our natural reaction is to avoid pain.

I have found a stock that appears like it could be a perfect investment for those who like to buy when there is "blood in the streets". In recent months investors have lost money in this stock, and it now trades for about half of its 52-week high and it offers a dividend yield that rivals what some popular mortgage real estate investment trusts pay, with a yield of about 14%. Investors who seek high yields should start to consider France Telecom (FTE) for these two reasons:

  1. You have to have some courage to buy shares of France Telecom. Many have lost money here and the situation in Europe remains ugly. It looks like a stock that is easy to hate, and that makes it a perfect contrarian play. If you make decisions based on fear and emotion, it's easy to walk away. However, if you consider that France is not going anywhere, and that France Telecom is basically a utility that offers Internet service, mobile phones, and fixed-line communications, which are all basic needs for most French consumers and businesses, it starts to become easy to like. The company remains solidly profitable even at a time of heightened competition and economic distress, and it offers a yield over 14%. France Telecom also has growth potential as it expands into Egypt and select countries in Africa. In time, the European situation will stabilize and provide these shares with what is likely to be a sharp rebound.
  2. Mortgage REIT stocks offer a tremendous yield, but it is not wise to put all your eggs in one basket. Because of this, it makes sense to consider investing in other stocks that offer high yields. France Telecom fits that criteria, with a 14% yield. With mortgage REIT stocks like Annaly Capital (NYSE:NLY) or Chimera (NYSE:CIM), you don't have many direct risks related to Europe, but you also don't appear to have the potential upside of France Telecom either. A few years from now Europe's issues could be more or less resolved or at least stable. If that is the case, shares of France Telecom could rebound towards $20 or more, just as it has in the past. Investors buying at this time of distress could set their portfolios up for major gains if the share price rebounds, and also collect dividends that compete favorably with the mortgage REIT stocks. By contrast, the best case scenario for shareholders of Annaly or Chimera is probably to receive high dividend yields, but it's hard to make a strong case for significant capital appreciation. France Telecom does have strong potential for a higher share price in the future, because historically, telecom companies trade at values that offer a yield of 5 to 8%, not 14%. U.S. based telecom companies like AT&T (NYSE:T) offer a yield of about 5% right now. Incredibly, AT&T pays $1.76 per share in annual dividends, and France Telecom pays about the same, $1.78 per share. Yet AT&T shares trade for over $34 or nearly triple the price of France Telecom which trades for less than $13 per share. Sure, things are going better in the United States, but when you see such a huge disparity in the valuation, it could be a classic "buy low" opportunity. If you need stability but are willing to accept a lower yield and what is likely to be limited upside potential, maybe AT&T shares are for you. If you want high yield, but limited upside potential, shares of Annaly and Chimera could make sense. However, if you can accept some volatility but want high yields, and an excellent chance of capital gains, France Telecom is a stock worth considering now.

Key Data Points For France Telecom From Yahoo Finance:

  • Current Price: $12.90
  • 52-Week Range: $12.46 to $22.52
  • Dividend: about $1.78 annually which yields 14.2%
  • 2012 Earnings Estimate: $1.87 per share
  • P/E Ratio: about 6.5 times earnings

Key Data Points For AT&T From Yahoo Finance:

  • Current Price: $34.15
  • 52-Week Range: $27.29 to $34.41
  • Dividend: $1.76 annually which yields 5.2%
  • 2012 Earnings Estimate: $2.39 per share
  • P/E Ratio: about 14 times earnings

Key Data Points For Annaly From Yahoo Finance:

  • Current Price: $16.42
  • 52-Week Range: $14.05 to $18.79
  • Dividend: $2.20 annually which yields 13.5%
  • 2012 Earnings Estimate: $1.97 per share
  • P/E Ratio: about 8 times earnings

Key Data Points For Chimera From Yahoo Finance:

  • Current Price: $2.71
  • 52-Week Range: $2.38 to $3.82
  • Dividend: 44 cents annually which yields 16%
  • 2012 Earnings Estimate: 44 cents per share
  • P/E Ratio: about 7 times earnings

Data is sourced from Yahoo Finance.

Disclosure: I am long FTE.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.