I searched for consistent dividend-paying stocks that are selling at a discount to fair value. These stocks have above-average yields. These are good alternative investments when compared to their fixed income counterparts. One of the key issues is whether dividends are sustainable or not. Investors are advised to do their own due diligence before investing in these stocks.
Altria Group Inc. (NYSE:MO)
Another good source of dividend income is Altria. Its business interests are recession proof. It carries established brands in the liquor and tobacco space. Thus, demands of these products would more likely do well in any kind of environment. Its shares are up by 13.01%. Over the 5-year period, shares have increased by 53%. This is strong long-term share outperformance, excluding dividend yield. The reason is that management has increased Altria’s earning power and has rewarded investors very well.
The main risk is the company's flagship cigarettes business. Analysts are concerned about declining price growth and a weak macroeconomic environment. However, the company sees that its smokeless tobacco and wine business will be its future growth driver. The stock is currently trading at 12.69 times next year’s earnings and has a dividend yield of 6%. In contrast, similar companies like Reynolds American (NYSE:RAI) trades at 13.83 times earnings and Lorillard Inc. (NYSE:LO) is valued at 13.66 times earnings. RAI and LO have dividend yields of 5.40% and 4.50% respectively. It seems that management has done a good job in capital allocation. The company has also aggressively repurchased its shares in the market. This will likely increase shareholder wealth over time.
Transocean Limited (NYSE:RIG)
Transocean is a global leader in offshore drilling services. It has one of the largest offshore rigs in the market. This one of the key advantages of Transocean, which basically gives them power over the negotiation of contract rates. Its shares have fallen by 29% over concerns on declining oil prices. Investors are worried that declining oil prices would have an impact on exploration activities. This downside is protected in the near-run as the company has healthy backlogs. Thus, revenue visibility is assured in the coming quarters.
The stock is currently trading at 8.54 times forward earnings and 75% of book value. It also has a dividend yield of 6.80%. This is higher than valuation of Noble Corp. (NYSE:NE). Noble is valued at 7.90 times earnings and 1.08 times book value. NE also has a dividend yield of 1.80%. Meanwhile, Ensco Plc (NYSE:ESV) trades at 7.34 times and 93% of book value. ESV carries a dividend yield of 3.40%. The current pricing in exploration contracts still suggest continued weakness in the oil industry. Once oil prices trade above $90, investors should expect a rebound in rig stocks. I believe Transocean is one of the cheapest rig stocks today. I would not be surprised if shares would double once oil prices start to pick up.
Seagate Technology (NASDAQ:STX)
Seagate is a hard drive manufacturer. It sells its products through OEMs, distributors and retailers. The hard drive industry has become more concentrated. This means that there are the big players will command bigger market share. The result is increased margins and profitability for the players, as well as strong returns for investors. For the year, analysts are expecting revenues of $11.54 billion, an increase of 5.20% over the prior year. This will result in earnings per share of $1.57, a 24% increase year on year. Its shares have declined by 25% for the year. Investors are concerned that weakness in Seagate’s quarterly performance will result in missing their full year targets.
At the current price of $11.17, the stock is valued at 5.19 times next year’s earnings and carries a dividend yield of 6.50%. These valuations imply that the market is still expecting further softness in the company’s products. In contrast, Western Digital Corp. (NYSE:WDC) trades at 6.59 times earnings and SanDisk Corp. (SNDK) is valued at 9 times earnings. Investors would have to wait until the third quarter earnings to have a clear picture of the future direction of earnings. The near term catalysts would be a better than expected earnings outlook for next year.
MFA Financial Inc. (NYSE:MFA)
MFA Financial Inc. is a good stock to look at in the mortgage REIT space. It basically invests in both agency and non-agency backed securities. Its shares have fallen by 20% for the year. The long term track record of MFA Financial is solid. For the last 5 years, it has grown its income by 10.39% and dividends by 17.05%. This means that management has performed a good job in various interest rate cycles.
The stock is currently valued at 6.13 times next year’s earnings and 83% of book value. It also has a dividend yield of 15%. Other mortgage REIT stocks also trade at single digit multiples. Annaly Capital Management (NYSE:NLY) is valued at 6.28 times earnings and 94% of book value. It has a dividend yield of 15%. Meanwhile, Chimera Investment Corp. (NYSE:CIM) trades at 5.64 times earnings and 84% of book value. CIM also carries a dividend yield of 18.80%. I believe that the market is valuing these mortgage REIT stocks as if they are going to default anytime soon. The turnaround in share price would take longer as housing has not yet seen its bottom. Risk-averse investors should buy mortgage REIT stocks only if they are comfortable holding these securities.
AT&T Inc. (NYSE:T)
AT&T is one of the few telecom companies that increase its dividends consistently. This is attributed to its consistent profitability. It has grown its revenues by 23.21% and earnings per share by 18% over a 5-year period. This appears to be better than its counterparts. The telecom industry’s revenues grew by less than 1% and earnings at 2.48% over the same period. In turn, AT&T has consistently paid out 52% of its income. It has an average annual dividend growth of 5%.
For the year, its shares have slightly declined by 1.91%. At the current price of $28.77, the stock is trading at 11.28 times next year’s earnings and 1.52 times book value. It also has a dividend yield of 6%. These valuations do not appear dirt cheap but it’s still reasonable. I believe the good dividend yield of the company puts a cushion in declining markets. In contrast, Verizon Communications (NYSE:VZ) is valued at 14 times earnings and 2.65 times book value. VZ also carries a dividend yield of 5.50%. Another telecom company such as Vodafone Plc (NASDAQ:VOD) trades at 8.62 times earnings and 1.03 times book value. VOD has a dividend yield of 7.30%. The reason why VOD trades lower is that its exposure in the European markets. In the US telecommunications scene, AT&T seems inexpensive relative to peers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.