If you feel that most of the capital-gains potential has been squeezed out of the stock market, you may be interested right now in stocks with dividend appeal.
That can include stocks with above-average dividend yields, or good dividend growth rates, or both.
In addition to beefing up an investor’s total return on a stock, dividends can be a sincerity barometer. When a board of directors hikes the dividend, it usually believes that earnings progress is sustainable.
Here are five stocks that I think have dividend appeal now.
Cummins
Cummins Inc. (CMI, Financial), a leading maker of diesel engines, is based in Columbus, Indiana. The stock is yielding about 3% in dividends, and the company has been raising its dividend about 15% a year for the past five years.
Is Cummins stock cyclical? You bet. It lost more than half its value in the agonizing recession of 2008, then quadrupled in the following two years. There have been continued ups and downs since then, but lately the company and the stock have been on the upswing.
Western Digital
Sporting a 3.6% dividend yield and selling for less than six times earnings, disk-drive maker Western Digital Corp. (WDC, Financial) looks mighty tempting to me. It also scares me a little: Over the years, I’ve had both big profits and big losses in this stock.
I don’t own it at the moment because my firm is fairly heavy in other technology stocks. But Western Digital has strengths. It’s part of a near-duopoly in hard drives (with Seagate Technology) and part of an oligopoly in solid-state drives (with Samsung Electronics, Intel Corp and a few others).
Analysts think Western Digital’s earnings per share will fall in 2019 to about $11.07 a share from about $14.73 this year. Let’s say they’re right; the stock is still selling for only six times next year’s number.
Tyson Foods
The stock price of Tyson Foods Inc. (TSN, Financial) has declined steadily this year, from about $81 to a little above $61. The meat producer (beef, chicken and pork) has shown little growth from its basic meat business, but a lot of growth in prepared foods based on its meats.
Though not fast-growing, Tyson is very profitable. And the price is right for me, with the stock at a little over 10 times earnings. The dividend yield is 1.9% but what really catches my eye is the growth rate in dividends the past five years, a sizzling 32%.
Macy’s
Two things draw me to Macy’s Inc. (M, Financial). One is the fat dividend yield of 4.6% The other is that – despite the purported “death of retail stores” in general and department stores in particular -- Macy’s has posted four consecutive quarters of rising earnings.
Harry A. Lawton, the company’s president, sold about $1 million worth of his shares in September, never an encouraging sign. But several other insiders have purchased shares this year.
Argan
More speculative is Argan Inc. (AGX, Financial), a Rockville, Maryland, company that builds gas-fired and biofuel-fired energy plants. The issue is that much of the company’s backlog has vaporized.
Only two analysts, both from small firms, cover Argan, and they are split on whether it’s a “buy” or not. I suspect it is, but no one should underestimate the risk. The company’s revenue will probably get close to $900 million this year, but analysts predict it will be cut almost in half next year.
Compensating for that risk, the stock sells for 14 times earnings (in a market that’s at a multiple of 21), and offers a 2.4% dividend yield. The dividend has grown at close to an 11% clip the past five years. The company is debt-free.
Track Record
This is the 19th column I’ve written about stocks with dividend appeal. Of the previous 18 columns, 15 have been profitable but only 10 have beaten the Standard & Poor’s 500 Index.
The average return on my recommendations in this series has been 13.8%, compared to 9.8% for the S&P 500.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Last year, three of my five picks beat the index but the party was ruined by a big loss in Pier 1 Imports Inc. (PIR, Financial). GameStop Corp. (GME, Financial) was also a loser, while Qualcomm Inc. (QCOM, Financial), Foot Locker Inc. (FL, Financial) and Stewart Information Services (STC, Financial) did well.
Overall, I was up 4.3% last year while the S&P 500 returned 15.3%.
Disclosure: I own Macy’s for many of my clients and personally. I own Argan, Stewart Information Services and Tyson Foods for one or more clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
