2 Stocks Worth Buying On Dips For Yields Around 10%

Includes: SDRL, SFL
by: Trade In Mexico

Investor demand for dividends has pushed many stocks to trade at or near 52-week highs in recent weeks. Because of this, many dividend stocks have seen yields drop as the share price rises. The average stock in the S&P 500 Index now yields just over 2%, however, there are a number of stocks that still offer very generous yields.

It's important for investors to be more cautious when putting new money to work due to the big rally in the markets and in many dividend stocks. The issues in Europe remain challenging and the United States could see a downturn later this year due to the "Fiscal Cliff". In a recently released report, the Congressional Budget Office said it sees the potential for a "significant recession" in the near future, if Congress fails to act on budget and tax issues.

Another issue for dividend investors to consider is that the tax rate on dividend income could be poised to jump significantly in the coming months, if the "Bush" tax cuts are allowed to expire. These issues highlight why investors should not be chasing yield, but rather consider being patient and buying on more significant dips. Here are two high-yield stocks that are trading near 52-week highs that investors should consider buying on dips:

Ship Finance International Limited (NYSE:SFL) owns a fleet of ships that includes 62 vessels and rigs. It is also under contract to acquire seven additional vessels. With its focus on long-term fixed charters, (the average length is about 11 years), this company has a more stable business model when compared to companies that focus on shorter-term charters.

Like many companies, Ship Finance was impacted by the financial crisis and it reduced the dividend payout in the fourth quarter of 2008, to 30 cents per quarter. However, it has since been raising its dividend and the distribution has now reached 39 cents per quarter. Historically, this company has been committed to returning capital to shareholders and that trend looks likely to continue. When shipping rates improve, the dividend payout could be poised for more increases. This stock has recently jumped from about $15 to $16 per share, so it makes sense to wait for a pullback.

Key Data Points For Ship Finance International:

  • Current Price: $16.35
  • 52-Week Range: $8.62 to $16.57
  • Dividend: $1.56 annually, which yields 10.3%
  • 2012 Earnings Estimate: $1.72 per share
  • 2013 Earnings Estimate: $1.79 per share
  • P/E Ratio: about 10 times earnings

Seadrill Limited (NYSE:SDRL) shares have become very popular with the dividend crowd. Since June, the stock has jumped from about $33 per share to over $40 today. It's easy to see why dividend investors are focusing on Seadrill. It offers a dividend yield that is about 3 times the size of Exxon Mobil Corporation's (NYSE:XOM), which currently yields about 2.6%.

Seadrill has one of the most modern and largest fleets of drillships, jack-up rigs, semi-submersible rigs and tender rigs. Because it has some of the newest equipment, it can charge premium rates when it contracts with some of the world's largest oil and gas companies (companies like Exxon). This company has been raising its dividend since 2009, when it was just 50 cents per quarter. It now pays 82 cents per share on a quarterly basis.

The stock appears to have strong support around $36 per share, so it makes sense to wait for a pullback to that level. At about $36 per share, the dividend yield approaches nearly 10%, and it could also offer capital gains upside in the long term.

Key Data Points For Seadrill:

  • Current Share Price: $41.27
  • 52-Week Range: $24.68 to $42.34
  • Dividend: about $3.20 per share, which yields almost 9%
  • 2012 Earnings Estimate: $3.14 per share
  • 2013 Earnings Estimate: $3.55 per share
  • P/E Ratio: about 10 times earnings

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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

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