Interest rates are up since the election. Rates on the ten-year Treasury note has climbed more than 25% since Donald Trump became the President-elect. With the rate at 2.36%, investors with $1 million in ten-year Treasuries can earn income of $23,600 a year. This is a problem for two reasons. Many investors simply don’t have $1 million in Treasuries and if they do, the income of less than $2,000 a month may not be sufficient to maintain their standard of living.
Elections always bring hope for change and this one is no different. The Federal Reserve is expected to raise interest rates three times before the end of 2017. This would push short-term rates above 1% for the first time since the financial crisis. But, there might be less impact on rates of longer term securities. Wells Fargo Economics Research recently issued a forecast that inflation will remain low for the next few years and rates on ten-year Treasuries will remain below 3% into 2018.
Low rates should be good for the economy. For several years, the Fed and other central banks around the world have told us low rates will lead businesses to invest resulting in lower unemployment and higher wages. Maybe, this forecast will finally come true. Whether it does or not, one fact remains unchanged – investors will need income and many investors will need more income that Treasuries or many other fixed income investments provide. This indicates income stocks could continue to be attractive.
This week, we have a unique view of income stocks. We looked for stocks with a history of paying dividends that are trading for less than $5. We also required the companies to be profitable over the past twelve months. Profitable companies are more likely to maintain their dividends while companies suffering losses are at risk of cutting dividends. Our list represents a diversified income portfolio for investors looking for ways to beat the income available from bonds.
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Ambev S.A. (NYSE: ABEV) through its subsidiaries, produces, distributes, and sells beer, draft beer, other non-alcoholic beverages, soft drinks, malt, and food throughout the United States, Latin America North, Latin America South, and Canada segments. ABEV also provides carbonated soft drinks, bottled water, isotonic beverages, energy drinks, and ready-to-drink teas under the Guaraná Antarctica, Guaraná Antarctica Black, Gatorade, H2OH!, Lipton Iced Tea, Fusion, Monster, Red Rock, Pepsi-Cola, and Seven Up brands.
ABEV is based in Brazil, a country facing political turmoil and a recession. However, the weekly stock chart shows ABEV offers significant potential rewards and a relatively small degree of risk.
The price target is near recent highs at $6.43. The risk is likely limited to the recent lows near $4. The stochastics indicator at the bottom of the chart shows the stock is oversold and likely to rebound soon. The yield of about 2% provides some income while waiting for the potential capital gains.
Lloyds Banking Group plc (NYSE: LYG) provides banking and financial services to customers in the United Kingdom, as well as internationally. LYG operates through four segments: Retail, Commercial Banking, Consumer Finance, and Insurance. These segments provides products ranging from personal loans, savings, and mortgages to credit cards and retirement savings options.
LYG offers a 3% yield. The chart shows the stock has been volatile since the referendum on Brexit established a bottom in the U.K. stock market.
LYG pulled back and tested the low, a bullish pattern, and now seems to have formed a double bottom with a target about 12% above the recent price. A longer term target near resistance at $4.50 can also be seen on the chart.
Office Depot, Inc. (NASDAQ: ODP) sells office supplies, technology products and solutions, business machines and related supplies, facilities products, and office furniture. ODP also offers copy and printing services to its customers. ODP operates 1,564 stores throughout the United States, as well as 147 international stores in South Korea, France, Australia, Sweden, and New Zealand. ODP offers its products under various labels, including Office Depot, OfficeMax, Foray, Ativa, TUL, Realspace, WorkPro, Brenton Studio, Highmark, Grand & Toy, and Viking Office Products.
ODP offers a yield of about 2%. Management initiated a quarterly dividend in August, signaling their belief in the company’s financials. Companies are generally reluctant to cut or eliminate dividends, especially so soon after initiating the payments. That indicates the income is likely to be safe. Analysts expect earnings per share (EPS) of about $0.45 in each of the next two years. A price-to-earnings (P/E) ratio 15, the long-term market average, provides a price target of $6.75, a potential gain of about 30%.
PDL BioPharma (NASDAQ: PDLI) manages a portfolio of patents and royalty assets, consisting of its Queen et al. patents, license agreements with various biotechnology and pharmaceutical companies, and royalty and other assets acquired. PDLI provides non-dilutive growth capital and financing solutions to late-stage public and private healthcare companies and offers immediate financial monetization of royalty streams to companies, academic institutions, and inventors. PDLI is also involved in the humanization of monoclonal antibodies and the discovery of a new generation of targeted treatments for cancer and immunologic diseases.
Cash flow from operations has consistently been positive and exceeds the dividend payouts by 200% or more in each of the past five years. This indicates the 9.7% yield on the stock appears to be safe. The company is trading at a discount to its book value of $4.53 and that provides a conservative price target for the stock. Companies in the industry have historically traded at an average price-to-book value of 4.5 indicating significant gains in the stock are likely.
Banco Santander, S.A. (NYSE: SAN) together with its subsidiaries, provides various retail and commercial banking products and services for individual and corporate clients. SAN offers traditional banking products to its clients, such as, mortgages, auto loans, personal loans, loans to purchase durable goods, as well as credit and debit cards. SAN also offers trade finance, bond and securitization services, as well as corporate loans. In addition, SAN provides corporate banking, treasury, and investment banking activities to its customers. SAN currently operates through 13,030 branches worldwide.
SAN is headquartered in Spain and that may explain the discount on the stock and the higher than average yield of 4.4%. Analysts expect SAN to remain profitable with EPS of $0.48 next year. Banks have historically traded with an average P/E ratio of 14.7 providing a price target of $7, a potential gain of about 40%.
United Microelectronics Corporation (NYSE: UMC) is a global semiconductor foundry that provides advanced technology and manufacturing for applications spanning every major sector of the IC industry. UMC provides circuit design, mask tooling, wafer fabrication, and assembly and testing services. The company also engages in the research, development, and manufacture of products in the solar energy and LED industries. UMC operates in Taiwan, Japan, Korea, China, Singapore, Europe, and the United States.
UMC is based in Taiwan and like many companies in that country pays one dividend a year. Every year since 2010, the company has announced a dividend that is payable in July. That provides a yield of about 5% at the current price. Analysts expect UMC to report EPS of $0.10 this year and $0.12 next year with a jump to $0.20 in 2018. A reasonable price target is $3, a forward P/E ratio of 15 which is below the industry’s long-term average of 20.2.
These six stocks offer a diversified income stream for investors unwilling to accept the low yields on Treasuries. They also offer potential growth since each stock appears to be significantly undervalued.