By Renee Ann Butler
Dividend stocks can be great additions to a portfolio. It's like the stock has a built in safety, a little something to offset losses. Alternatively, some investors may choose to use a dividend stock to generate income - after all, while it is a little riskier than many other more traditional investments like bonds and CDs, the payout is greater and the money isn't locked down for a set period. Whatever your investing aim, dividend stocks can be good, but they can become great when they offer strong upside as well as a regular payout.
To find stocks that have a strong potential for that type of growth, I limited my search to those stocks that pay at least a 2% dividend, have a market cap over $2 billion and carry a consensus analyst recommendation of "Strong Buy". Just three stocks fit that criteria.
EV Energy Partners LP (EVEP) is an oil and gas drilling and exploration company with a market cap of $2.04 billion. Its forward price to earnings ratio is a little high at 30.58, especially when compared with its peers' average of 11.28, but it pays a 6.33% dividend yield on a payout ratio of 73.98%. EVEP also has strong predicted growth. EVEP saw some action from Ken Griffin's Citadel Investment Group during the first quarter and Jim Simons' Renaissance Technologies reduced its position in the company but kept a $4.26 million stake. CEO Mark Houser is also bullish on the company. He recently filed an SEC Form 4 stating that he purchased 2,000 shares at $56.89 each on 16 May 2012. Granted, since then, EVEP has been falling - it is currently trading at $48.31 - but the stock does carry a mean one-year target estimate of $90.64, which I think makes it worth a second look.
Service Corp International (SCI) is a personal services company with a $2.41 billion market cap. It is priced at 14.22 times its forward earnings - a discount to its peers' average of 15.33 - and pays a 2.16% dividend yield on a 29.32% payout ratio. It also has an impressive record of earnings per share growth, net income increases and decent return on equity. SCI also has the eye of some of the biggest names in the hedge fund industry. Mason Hawkins' Southeastern Asset Management had more than 1.5% of its portfolio invested in SCI at the end of the first quarter, in a position valued at $363.67 million. SCI recently traded at $11.09. Analysts give the company a mean one-year target price of $13.75. This is a little low, especially when compared to a stock like EVEP, but I don't recommend SCI as one-year holding. This is a good solid company with a modest dividend, a low payout ratio and, most importantly, good management. Together, I think these factors will propel SCI to above average returns going forward.
Timken Co. (TKR) is a machine tools and accessories company with a $4.40 billion market cap. It is priced low at only 7.05 times its forward earnings, whereas its industry averages 11.90. TKR offers a 2.04% dividend yield and has a payout ratio of just 16.32%. It is trading at $45.11 a share and has a mean price target of $65.20. Moreover though, TKR is just a strong company. Citadel Investment Group is a fan of this company, as is AQR Capital Management, Millennium Management and Passport Capital - and I can see why. The stock may have had somewhat lackluster performance but it has attractive valuation levels, great growth in net income, impressive increases in earnings per share and decent debt levels. With figures like TKR has, it is worth the risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.