3 Interesting Dividend Stocks On My Watchlist

Includes: HBAN, PDLI, SCI, SCS
by: Justin Kuepper

Dividend stocks have been in favor over the past couple of years thanks to very low interest rates in the U.S. After all, why invest in Treasuries that pay 1.5% when you can own a mega-cap dividend stock paying more than 4.0%? However, there are signs this capital inflow may be pushing valuations too high in some cases, which makes valuations a key concern.

Keeping these things in mind, here are my three favorite dividend stocks:

SCI: A Stock that is Far from Dead

Service Corporation International (NYSE:SCI), a provider of deathcare products and services in the U.S. and Canada, offers a 2.1% dividend yield and a low 14.6x forward earnings multiple. [1] With a history of strong earnings growth, the stock has attracted the attention of many hedge funds and analysts, but investors should be aware of its hefty (but manageable) debt load.

Last quarter, the company reported revenues that increased 3.9%, due to higher case volume and pre-need property sales, while net income also jumped 23.9%. While cash flow fell during the period, the decrease was primarily due to an increase in net cash tax payments, which were expected charges that are one-time events. [2]

HBAN: Multiple Catalysts Ahead

Huntington Bancshares Inc. (NASDAQ:HBAN), a regional bank that is the third largest SBA lender in the U.S., may not be in the hottest sector right now (with T-Bill yields where they are), but there are many catalysts that could send this dividend stock higher. [3] And currently, the bank offers a strong 2.62% dividend yield in addition to the capital appreciation potential.

Recently, FBR Capital Markets downgraded the bank due to "a lack of material positive catalysts". But a recent article by Chris Katje points out that the bank has several catalysts that were missed in the report. Notably, the firm's 10-year agreement with Steelcase (NYSE:SCS), along with other agreements, will enable it to expand its footprint by more than 50%. [4]

Moreover, the banking industry may not be ideal now with low interest rates, but regional banks are outperforming on a relative basis. [5] Given this bank's recent drop due to the FBR Capital Markets downgrade, now may also represent a good entry point for investors. And those looking to reduce risk or add income could also explore writing covered call options.

PDLI: Tasty Dividend but No Free Lunch

PDL BioPharma Inc. (NASDAQ:PDLI), a biotech company focused on patents and royalty assets, represents a controversial play with a strong nearly 9.5% dividend. [6] While the company trades at a significant discount to its growth, investors are somewhat concerned over its patent portfolio that expires in late 2014, and its ability to replace that portfolio with new assets.

Interestingly, the stock offers both a high dividend and a low price-earnings ratio, which makes it doubly undervalued (income and capital gains appreciation). In my opinion, the company's capital gains risk is accounted for in the low valuation, which leaves the high dividend as an extra positive for investors, and makes it an enticing stock.

Those looking to take advantage of the dividend without the capital gains risk component may want to consider a relatively simple strategy that could reduce risk over time - covered calls. By writing covered calls over time, investors can reduce their breakeven point/risk and still receive the strong dividend payments as income. But, investors should note the options market for this stock isn't especially liquid, which means there may be some added risk.

Sources Used

  1. Yahoo! Finance
  2. SEC Filings
  3. PYMNTS.com
  4. SeekingAlpha
  5. Barron's
  6. Yahoo! Finance

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.