2 Dividend Stocks To Buy, 1 To Avoid

Includes: BX, CTL, SCCO
by: Insider Monkey

by Jake Mann

Dividend stocks aren't sexy. They have low growth rates, low volatility, and you can't tell your friends how you doubled your money in six months by investing in high-dividend stocks. However, dividend stocks outperformed the market by a large margin in 2011 as long-term interest rates plunged and investors rushed into high-dividend stocks. Most aren't attractively priced anymore, but we still managed to find two gems for long-term investors.

Buy -- Blackstone Group LP (NYSE:BX)

Away from the typical investor's spotlight, Blackstone Group is a publicly traded private equity firm that also has branches in the real estate and asset management businesses. From a broader perspective, the private equity industry has performed admirably in recent months despite less-than-ideal economic stability. In April 2012 alone, major private equity deals totaled over 130, which was more than the preceding April. Though it has only struck two major deals in 2012, Blackstone specifically is rumored to be involved in a discount program with the soon-to-be-public Carlyle Group, where it will receive shares at a price lower than the IPO rate.

Shares of Blackstone specifically have been a favorite of hedge funds, as prominent managers like Dmitry Balyasny, Robert Joseph Caruso, and John W. Rogers all increased their long positions by at least 50% at of the end of last year. While these managers have been met with a slightly negative return thus far in 2012, there is reason to believe Blackstone could erase these losses by the fall. The stock provides a solid dividend of 6.60% -- higher than its two major competitors, Fortress Investment Group LLC (NYSE:FIG) and Och-Ziff Capital Management Group LLC (NYSE:OZM), which yield 5.40% and 1.90%, respectively.

Since 2009, Blackstone has grown its revenues by 83% and its free cash flow by 167%. Interestingly, the company has a P/CF of 5.9 times, which is below the industry average of 11.0 times, so it is likely that investors have not properly valued Blackstone's cash increases just yet. Look for shares of Blackstone to rise in the intermediate term due to these valuation issues, and look for long-term gains as the economic environment surrounding private equity improves.

Buy -- CenturyLink (NYSE:CTL)

CenturyLink is the third-biggest telecommunications and broadband provider in the U.S., behind Verizon (VZ) and AT&T (NYSE:T) and ahead of Sprint (NYSE:S). For investors looking to add to the stock's 7.50% dividend yield, CenturyLink has been the fastest growing of the bunch since the recession with a three-year average revenue growth of 80.8%. Compared to Verizon (4.4%), AT&T (0.7%), and Sprint (-1.9%), we can see that CenturyLink is the hare in a race full of tortoises. This time, the hare should win. With the acquisitions of Embarq, Qwest, and Savvis, we can begin to understand how CenturyLink has achieved this otherworldly growth. Congruently, the company has also grown its cash hoard quickly, surpassing $4 billion for the first time in 2011. Even though the company's cash flows have quadrupled in the last five years, a P/CF near the industry average signifies that investors need to jump on this unique combination of dividends and growth.

It seems that hedge funds already have; at the end of 2011 there were 23 managers going long CenturyLink compared with 14 one year earlier. Some of the most bullish include Richard Schimel and Donald Chiboucis. If this is not enough to convince investors, a positive macroeconomic setting is also present. As mobile phones continue to become more popular -- analysts think it will be 2020 before providers have to worry about market saturation -- look for telecom stocks like CenturyLink to make investors very cheery.

Sell -- Southern Copper (NYSE:SCCO)

One of the largest copper companies in the world, Southern Copper is huge in terms of two things: reserve quantity and production capacity. As such, the company's most immediate fortunes hang on the price of copper and the success of its recently developed mines. Unfortunately, these factors have investors feeling dreary. Take the price of copper: After a rich history of bullish activity almost every April, prices actually fell this past month by almost 10%. As this occurs, the revenues of companies like Southern Copper are inherently lower, but the news gets worse. The company's new projects in Peru and Mexico have hit snags in recent months, as executives failed to account for the risks of social instability and resistance to new mining projects. Amazingly, around 50% of the company's assets used for excavation are sitting in these areas, despite its recent admission that both operations may not come to fruition until the next two to three years, if ever.

If these external risks weren't enough, the company has a few fundamental issues that should also be sending bearish signals to all investors. First, Southern Copper's most recent dividend payout ratio -- the percentage of earnings paid to shareholders -- was above 100%. Typically, anything above 80% is unsustainable, which is evident by the fact that future dividends are expected to be lower, though estimates vary. Second, the company's P/E (12.0 times) and P/CF (13.6 times) are both higher than the industry averages of 9.3 times and 7.4 times, respectively. Notably, Southern Copper's cash flows remained basically flat over the past year, so a P/CF overvaluation is not justified. A major competitor like Freeport-McMoRan Copper & Gold (NYSE:FCX) is trading at a better P/CF multiple, even though cash flow (5.5%) is growing at a more attractive rate. In all, investors would be wise to look for other high dividend stocks besides Southern Copper if they wish to sleep soundly at night.

Disclosure: I am long T.

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