I have interacted with a countless number of investors, traders, and other stock market participants over the years. These conversations have revealed certain primary issues and problems affecting the majority of stock market traders and investors.
These fundamental issues have nothing to do with knowledge or investing skills. In fact, I am often very impressed with the knowledge and skillset of many beginning investors. The real problem is far simpler than building a knowledge or skill set.
The primary issue I have discovered that plaques a broad majority of new investors is not having enough capital to execute profitable investing strategies.
It seems that every truly valuable investing idea takes a large sum of money to work in the right way.
Take the proven strategy of dividend investing for example. We recently published an article on the wealth-building power of dividend reinvestment in a stock portfolio. However, many dividend producing stocks are simply too expensive for those with modest capital for investment.
If a stock costs $55.00 per share, it takes $55,000.00 just to purchase 1000 shares of the stock. Sure, you can just buy a few hundred shares but wealth building with just a few hundred shares can be a painfully slow process. The truth is that for many investors building a wealth creating, properly diversified dividend reinvestment portfolio is simply beyond the budget.
There is no reason to get angry when you don’t have enough investment capital to build a diversified dividend portfolio. We have some good news for you.
The good news is that there is a solution to this vexing problem.
Believe it or not, there is a trick to building an effective dividend creating portfolio without having tons of money to invest.
This method not only takes advantage of the power of dividend reinvestment, it uses another proven wealth building fact.
This fact is the appreciation power of stocks trading $10.00 or less per share.
These low priced, dividend dynamos allow investors with even modest investing capital to rapidly build a diversified wealth creating portfolio. Add in the fact of the possible huge appreciation of cheap stocks and it paints a very compelling picture for low-priced dividend stocks.
Here Are 3 Cheap Dividend Stocks Under $10.00
1. Banco Santander (NYSE:SAN)
This giant international bank is currently throwing off a greater than 6% dividend yield. Believe it or not, the stock is selling for just above $7.00 per share making it an ideal low-priced dividend producer.
The diversified bank is well known as being one of the best managed and biggest banks on the planet. It trades on the New York Stock Exchange as an ADR. An ADR or American Depository Receipt allows foreign stocks to be traded in the United States providing direct access for U.S. based stock investors.
Banco Santander is one of the highest yielding inexpensive dividend stocks on the exchange. However, it’s critical to realize that the bank lowered its dividend earlier in the year. The lowered dividend is a result of the new Executive Chairman Ana Botin’s mandate to build the bank’ capital reserves. While this temporary setback effected existing investors, it is one of the reasons the shares are available at such discounted levels. In addition, the new Chairman’s mandate will create a stronger, more stable bank into the future.
2. Prospect Capital (Nasdaq:PSEC)
Prospect pays out an astounding 12.9% annual dividend yield yet only trades in the $7.70 per share zone.
The shockingly high yield is due to the fact that Prospect is a business development company or BDC. Business development companies specialize in financing small to middle market type companies. It is difficult for smaller companies to obtain financing directly from banks.
This is particularly true right now. Despite a loosening of personal lending criteria, traditional banks and lending institutions still have very stringent commercial lending criteria. This niche is filled by business development companies.
There is a very interesting reason why BDC’s pay such high dividends. According to IRS regulations if BDCs qualify as pass through entities if they distribute at least 90% of their income back to the shareholders. Meaning these firms don’t need to pay corporate income tax. Dividends is how a BDC distributes its required income back to the shareholders.
The current economic environment is perfect for BDC’s. A Federal Reserve Survey survey revealed a demand increase for business loans yet only less than 10% of banks are willing to decrease their lending criteria for businesses. In fact, close to 3% of banks have actually increased their credit standards for business lending.
What I really like about Prospect is the fact that 93% of its assets are floating rate and about 73% of its liabilities are fixed rates. What this means is climbing interest rates will increase Prospect’s profits. A great position to be in with rates potentially about to skyrocket!
- Fortress Investment Group (NYSE:FIG)
Imagine being able to invest into a nearly $70 billion plus private equity and hedge fund group for just around $7.70 per share. Sound incredible? You bet it does!
The Fortress Group’s shares have soared over 650% since the 2008 financial meltdown and currently throw off around a 4.2% dividend.
Fortress Investment Group describes itself as a leading, highly diversified global investment management firm with $69.9 billion in assets under management as of March 31, 2015. The firm applies its deep experience and specialized expertise across a range of investment strategies – private equity, credit, liquid hedge funds and traditional asset management – on behalf of approximately 1,700 institutional clients and private investors worldwide
Despite missing on revenue and EPS in the first quarter spooking many investors. However, we remain bullish on the company
Fortress Chief Executive Officer Randy Nardone stated, “We had a very active start to the year, highlighted by the launch of our largest Credit PE fund in our history, our largest PE fund crossing its preferred return threshold, and a number of important strategic transactions across our permanent capital vehicles.” He continued with, “With $1.2 billion of gross embedded incentive income not yet recognized in earnings and nearly $11 billion of dry powder for us to put to work, we see great prospects for growth and value creation in the quarters and years ahead.”
It’s important to note that the share price is solidly above the 200 day simple moving average but below the 50 day SMA. This technical pattern reflects a shorter term downtrend against a slowly climbing upward trend.
Special caution is advised when choosing low priced dividend payers. Always check the price history of the shares prior to investing. This is critical for all dividend paying investments but particularly true for low cost stocks. The reason being is that low cost stocks can often be more volatile than their larger brethren. What can happen is that the stock price can plunge which in turn will skyrocket the dividend yield. Make certain that the high dividend yield is not purely the result of a dropping share price when dealing with low priced dividend stocks.
The Key Takeaway
Dividend reinvestment is the key to long term stock market wealth. However, many new investors do not have enough starting capital to build a dividend producing portfolio with popular dividend payers.
The solution to this vexing issue is to locate dividend producing stocks that are trading for less than $10.00 per share. Not only are these low priced dividend payers perfect for those with modestly capitalized portfolios, they can offer great diversification and high yields for investors of every size.