Some analysts and investors believe a bubble in dividend stocks is building. Since the Federal Reserve has set interest rates at record low levels, it is nearly impossible to generate meaningful income through a savings account or certificate of deposit. For many investors, the best option to create some income and have almost "bond-like" stability has been to buy large-cap stocks like AT&T Inc. (T) or McDonald's Corporation (MCD). Ten-year U.S. Treasury bonds are paying about 1.5%, so companies like AT&T, which pays a yield of about 4.7%, or McDonald's, which pays about 3.2%, are attractive options, especially since both companies have stable business models that are relatively recession-resistant. That said, a recent Barron's article states there is no dividend bubble, and that McDonald's and AT&T might continue to draw investor interest.
While the dividend bubble argument seems premature for now, it is true that many dividend stocks have been pushed up towards 52-week highs, and this has brought yields down to less attractive levels. Going forward, investors might be well-rewarded by putting well-known large caps aside and focusing on the lesser-known names that often offer a much higher dividend. With that in mind, here is one stock that pays investors over 10%, and it could even be considered as a value stock ,since it trades for just around book value, and at about 7 times earnings:
Like many dividend stocks, Prospect's shares have been trending higher; however, the stock still looks undervalued and it trades very close to book value, which is $10.82 per share. This stock offers value, based on that plus a price to earnings ratio of just about 7, and a yield that will beat most investments. Patient investors should consider a buying-on-dips strategy that has been paying off for the past several months in this and other dividend stocks.
Here are some key points for PSEC:
- Current share price: $11.20
- The 52 week range is $7.58 to $12
- Earnings estimates for 2012: $1.50 per share
- Earnings estimates for 2013: $1.17 per share
- Annual dividend: $1.22 per share which yields 11%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.