Drop Out Of Your Comfort Zone With These 'Risky' Dividend Payers

Includes: ANF, EXC, SVU
by: Pey Shadzi

A few years ago, when I lived up in the Seattle area, one of my good friends Ian and I set forth on a two-day trip to go mushroom hunting out in the woods off I-90. If you want the honest-to-God truth, I was a bit skeptical of the whole trip to begin with. I mean, how were we supposed to know which mushrooms were perfectly edible and benign from others that could kill a man in less than 10 minutes? The entire idea of this trip began to make me nervous as we set foot into the never ending rows of trees and colorful mushroom offerings.

Eventually Ian convinced me to let my guard down and trust his ability to differentiate which mushrooms were safe and which ones were incredibly dangerous. Knowing a slight mistake in judgment could have severe consequences put an interesting and exciting spin on our mushroom picking expedition for sure.

But you know what? I often feel the very same way when purchasing shares of stocks that have been beaten down to seemingly impossible levels. Take, for example, shares of SuperValu Inc. (NYSE:SVU), the grocer everybody loves to hate. SVU is trading at the bottom of its 52-week range with a forward P/E of 3.5 and a dividend yield hovering around 7.5%. Despite SVU's ability to bring in lots of cash and a relatively solid plan of alleviating its $6.5 billion in debt over the course of the next, say, 10 years, investors continue to run for the hills. So which one is it? Is SuperValu a poisonous mushroom in disguise, waiting to kill investor hopes and dreams or the type of company that's left for dead because investors are worried it could be a poisonous mushroom? I suppose I'll leave that up to you to decide. I added to my holdings when the dividend blasted past that 7.5% yield so I'll let you guess how I feel about the subject.

Or how about shares of utility powerhouse Exelon Corporation (NYSE:EXC)? Exelon's another company that just can't seem to get any love these days. Despite being the nation's largest provider of energy on a mission to diversify its energy holdings by merging with Constellation Energy Group, Inc. and buying up wind and solar projects, investors continue to balk at the idea of holding onto this company and its generous 5.7% dividend. Exelon is also trading at its 52-week low with a forward P/E of only 12 and a payout ratio significantly lower than that of its peers. Sure some of its contracts will expire and there's always the threat of regulations pertaining to nuclear energy these days in the wake of Fukushima but am I the only one questioning why investors are throwing EXC away like they just realized it could be a poisonous mushroom out in the woods? I'll gladly hold onto EXC and reinvest that generous dividend while I wait for better days up ahead.

Last and quite possibly the least is Abercrombie & Fitch Co (NYSE:ANF), the specialty global retailer of clothes, personal care products and accessories for men, women and children. ANF's taken a major beating over the past 12 months losing over 50% of its market cap. This is prompting many to ask "how low can Abercrombie go?" Despite resting near its 52-week low, ANF is sporting a forward P/E of only 8.5, a PEG ratio of 0.55, $4.10 of cash on hand per share and a dividend yield of 1.9% with a payout ratio of 59%. Say what you will about the popularity of its clothing amongst your friends, but with financials looking like they do now, it's difficult to argue the company is overvalued.

Oftentimes, for whatever reason, stocks fall out of favor with investors. Perhaps it is future growth prospects, regulation changes, a careless CEO or a debt level significantly higher than investors like to see. Whatever the reason, if you're a value investor like me, curiosity seems to get the best of you and it becomes a game to figure out why a stock has been beaten down. Sometimes the position could be like a poisonous mushroom -- no good to anyone -- and other times a stock could be overlooked because it resembles a poisonous mushroom, regardless of how safe it is or delicious it might be to eat. It's our job to figure out which is which while preserving our capital and making smart investments for the future.

Best of luck out there. And remember, be safe!

Disclosure: I am long EXC, SVU.

Disclaimer: Whether you're picking poisonous mushrooms or dividend-paying stocks, it's always smart to do your research prior to "going all in." Though I feel these stocks are fairly valued, I'm not an investment advisor, so make sure to do your research prior to buying shares.