3 Dividend Payers with Price Potential

08/17/2011 9:30 am EST

Focus: STOCKS

Kate Stalter

CMO & Senior Financial Advisor, Better Money Decisions

Dividends are an appealing way to juice up a portfolio, but when researching a stock, don’t stop with its yield. Be sure to consider the company’s fundamental strength, its sector potential and whether its stock is showing sound technical performance, writes MoneyShow.com contributor Kate Stalter.

With market volatility, dividends have become top-of-mind for many investors, even those who generally seek price appreciation.

When screening for stocks with solid dividend yield, however, it’s important to keep price potential in mind. There are plenty of examples in the current market of stocks paying high yields, but whose share prices have plummeted along with the market correction.

Dividend stocks can be a good way to smooth returns in choppy markets, but be careful about choosing names that don’t have the fundamental firepower to continue attracting institutional investors. Institutional buying is what sends prices higher. Combined with a solid dividend, price appreciation can bring deliver good total return to a portfolio.

Many Brazil-based stocks have gotten slammed in the market downturn, but wireless telecom TIM Participacoes (TSU) has held above its 40-day moving average. The stock is attempting to rally this week, hitting some resistance at its 50-day line. Renewed market selling pressure on Tuesday was not helping its cause.

However, it remains one of the better technical performers among the Brazilian ADRs listed on US exchanges.

The stock currently has a dividend yield of 2.2%. Institutional investors have jumped aboard TIM in the past year, a good sign of confidence in the company.

The company has amassed a sound track record of triple-digit profit gains in recent quarters, but that earnings momentum is not expected to last. Wall Street analysts have pegged 2011 earnings at $1.51 per share, up 38% from 2010. However, growth is expected to essentially stall next year, with profit up just 1%.

Though TIM has been a good price performer over the past 15 months, watch out for a technical slowdown if the earnings growth fizzles.

A high dividend payer with Latin American exposure is Phoenix-based Southern Copper (SCCO), which has mining operations in Peru, Chile, and Mexico.

This is a stock that’s taken a terrible beating in recent months, as commodities-related names have sold off on worries of global economic malaise.

Shares are down 41% from January’s all-time high of $50.35. Downside volume has been heavy for most of this year.

While many mining company stocks have suffered because of economic fear, it’s worth noting that the fundamentals for Southern Copper remain intact. Earnings and sales have been growing at a healthy clip, and the return on equity is strong at 40%.

Earnings estimates remain fairly strong, with Wall Street eyeing profit growth of 64% to $3 per share this year, and 15% growth, to $3.45 per share, in 2012.

This is a name whose price decline—while making the dividend yield more attractive—is worrisome, in the near term.

Plenty of analysts and economists are confident in the long-term potential of resources companies as the global economy picks up. In particular, many say emerging markets will eventually begin snapping up the raw materials again to support growth. However, it’s not yet clear that Southern Copper’s price has bottomed in the current correction, so some caution is in order with this stock.

An altogether different type of miner is Alliance Resource Partners (ARLP), which sells coal to utilities and commercial users in the US. This company, which is structured as a master limited partnership, has a dividend yield of 5.1%. Its share price has held up fairly well in the market slaughter, with support at the 40-week moving average.

This does not mean it’s at a technical buy point, but the solid rebound in above-average volume last week could bode well for the stock. However, like all stocks, it could be prone to further downside trade if the general market shows further weakening.

Fundamentally, the picture is mixed. Earnings growth has slowed in the past two quarters, from 160% to 12%. Revenue came in at $458 million in the most recent quarter. That was a year-over-year increase, but a slower growth rate than the company enjoyed during most of 2010.

Analysts expect 2011 to end with profit growth of 18%, but they forecast that rate slowing to 7% next year.

The company has strong cash flow per share, $12.74. That number has been increasing in recent years, an indicator that often signals more fundamental strength ahead.

The stock’s market capitalization is $2.6 billion, but it’s somewhat thinly traded, moving just 102,000 shares per day.

While the dividend yield, technical strength, and fundamentals present some positive attributes, Alliance also gives some reasons to tread carefully. Thin stocks can sometimes be more prone to volatility than more liquid issues, since it just takes one or two big investors bailing out to send the price sharply lower.

However, because of the healthy dividend yields and tax-free treatment, master limited partnerships can offer some benefits, and are favorites of many financial advisors.

It’s tough to find solid price appreciation in this market, but dividend stocks can add some ballast to a portfolio. Choose carefully, though, because a company with fundamental problems can unravel, leaving investors with a price loser.

There is often an opportunity cost when that occurs, as price depreciation offsets the benefit of the dividends.

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