Income investing is often thought of as conservative. Because they are focused on income, income investors might try to minimize risk. Some do this by limiting their investments to blue chip stocks like the ones in the Dow Jones Industrial Average or other large stocks.
In the current market, this strategy might work well if you have enough wealth to generate adequate income from blue chip stocks. With the current yield on the Dow at about 2.3%, a $1 million investment will generate income of almost $2,000 a month. High quality bonds offer about the same yields right now so only the very wealthy are able to live off the income from their investments at today’s rates.
You can accept more risk and buy junk bonds which yield about 6%, generating about $5,000 per month in income for every $1 million invested. But the risks in junk bonds are unpredictable as the chart below shows. This is a weekly chart of an ETF that tracks junk bonds. Although it has rebounded sharply since February, junk bonds can destroy large amounts of wealth in a short amount of time.
To avoid risk, some investors turn to high quality bonds which yield about 2.3% right now. Many conservative investors might not realize how much risk they have with these “safe” investments. For high grade bonds, investors should expect to lose about 7.5% of their capital for each 1% rise in interest rates based on the latest available data. A 1% increase in rates seems almost inevitable at some point. This means more than three years’ worth of income is at risk for an event that is very likely to occur in the long run.
If you do have millions of dollars to invest, the risks in bonds are probably tolerable. For those of us who don’t have millions to potentially lose in bonds, we have to find higher levels of income in the stock market. For aggressive income investors, those seeking high income and growth in their investments, we have found some low-priced stocks with yields that are reasonably safe.
United Microelectronics Corporation (Nasdaq: UMC) manufactures custom-made computer chips using proprietary processes and techniques. Recently the company began developing and manufacturing solar energy and new generation light-emitting diode (LED) equipment.
UMC is based in Taiwan and like many companies in that country pays one dividend a year. Every summer since 2009, the company has announced a dividend that is payable in July. The dividend has been about $0.08 per share for the past four years. With earnings per share (EPS) expected to be about this same this year as they were last year, it’s reasonable to expect the dividend to be near that level again. This would be a yield near 4.3% at the current price.
UMC also offers growth potential. Semiconductor makers have usually traded at a price-to-sales (P/S) ratio of about 1.8. UMC’s revenue is expected to be about $4.5 billion in each of the next two years. This implies the stock should trade with a market cap of about $8 billion, or about $3.20 a share. UMC is potentially undervalued by about 70% at the current price.
LRAD Corporation (Nasdaq: LRAD) makes “directed acoustic products that beam, focus and control sound over relatively short and long distances.” These systems can be used for communications (a loudspeaker system) or for deterring threats over distances from 300 yards with a hand-held device to distances of more than 3.5 miles with the largest systems. These products are sold to law enforcement agencies and the military. The company notes on its web site that its systems were used for crowd control during riots in major cities over the past few years. According to a reporter on the scene of one riot, “You had a large concentration of people out here on the street…Once the LRAD sounded, a couple of warnings from the loudspeaker, the people scattered all at once…particularly once the LRAD went off. I was surprised to see just how effective that was.” The systems can also be used to communicate weather threats (sirens for tornado warnings) or to scare birds away from runways to avoid collisions with aircraft.
Over the past three years, LRAD’s sales have averaged about $20 million a year. EPS averaged $0.15 and the company initiated a dividend of $0.01 per quarter in January 2016. Earnings and cash flow are likely to sustain a dividend at this level. LRAD offers relatively safe income of about 2.5% a year.
LRAD is a small company with a market cap of about $51 million. It’s possible the company could be a target for a larger company in the defense sector. A buyout offer could come in at 3 to 5 times annual sales, or $60 to $80 million dollars. At the current stock price, LRAD is potentially undervalued by 17% to 56%, with a price target of $1.90 to $2.50. That’s a large range but demonstrates the stock offers both income and growth potential.
Sify Technologies Limited (Nasdaq: SIFY) is an integrated information and communications technology solutions provider located in India. SIFY was the first network in India to be IPv6-enabled. IPv6 is the most recent version of the Internet Protocol (IP) used to give addresses to devices on the internet. SIFY is now the third largest IP virtual private network service provider in India offering integrated solutions to over 4,000 corporate customers in over 1,100 cities.
SIFY’s revenue has grown steadily from $100 million in 2010 to $223 million in the fiscal year that ended in March 2016. EPS have grown from $0.005 in 2010 to $0.038 in the last twelve months. The company has paid a dividend of about $0.015 per share in each of the past three years, a yield of about 1% at the current price. SIFY pays its dividend just once a year, in May. The dividend is covered by both earnings and cash flow from operations and is likely to be maintained.
Based on the P/B ratio and the P/S ratio, SIFY could be worth about $1.70 a share, almost 50% higher than the recent price. The weekly price chart shows resistance at this level. The chart also shows support at $0.96 which could be used as a stop on the trade.
Navios Maritime Acquisition Corporation (NYSE: NNA) owns a fleet of 39 double-hulled tanker vessels used to transport crude oil, refined petroleum product and chemicals around the world. The company’s strategy is to charter its vessels to international oil companies and large vessel operators under long, medium and short-term charters. The strategy seems to be working well. Revenue has increased every year since 2010 but is expected to fall next year as lease rates for oil shipments drop. The company turned profitable in 2014 and is expected to report EPS averaging about $0.50 in each of the next three years. Cash flow from operations is positive and growing, indicating the dividend of $0.05 a quarter is most likely safe. At the current share price, the dividend yield is near 11.4%.
Management has paid a dividend every quarter since the fourth quarter of 2010, when cash flow from operations turned positive. It seems the dividend is important to management and investors should be able to count on it. Investors might also enjoy large capital gains in NNA. If we assume EPS of $0.50, the stock price should be worth at least $4, more than 125% higher than it is now.
The stock is most likely weighed down by fears that shipping rates will decline if the global economy slows. The chart below, a monthly chart of a popular shipping index, shows shipping rates have been low and generally stable for some time. Shippers have the option of placing ships in docks when rates are low and that seems to provide a floor for prices.
As shipping rates recover, NNA could deliver large gains. Even if rates never recover, NNA offers high income.
Taitron Components Inc. (Nasdaq: TAIT) is a low-volume stock that should be traded with care. Average daily volume is about 14,000 shares. The spread (the difference between the bid and ask prices) is generally about $0.05 to $0.10. If you take this trade, consider using a limit order between the bid and ask price to minimize trading costs. If the bid, for example, is $1.02 and the ask is $1.10, you could place an order at $1.05 to ensure you don’t pay too much for the stock.
TAIT has traded at a low price for years. To make the stock more attractive to investors, earlier this month the company’s management announced a dividend of $0.025 a quarter and noted they plan to pay that regularly. An annual dividend of $0.10 a year offers a yield of about 10%. Data services like Yahoo are not showing the annualized dividend yet and show a lower yield but management was clear in their SEC filing that they intend to pay quarterly. As data services show the steady dividend and other investors become aware of this, I believe the stock price will rise.
TAIT distributes electronic components including rectifiers, diodes and transistors. Its inventory consists of approximately 12,000 different products manufactured by approximately 100 different suppliers. Customers have the convenience of ordering from different manufacturers when they use Taitron. Revenue is low at about $6 million a year but cash flow from operations is high, averaging $0.13 per share a year over the past four years and supporting the annual dividend.
This is a risky income trade but as TAIT announces additional dividends, with the next one most likely coming in August, the stock could move significantly higher. The average yield in its industry is 2.6%. For TAIT to deliver that yield the stock would need to reach $3.80, a 276% gain from the current price.