Top Picks 2016: Seagate Technology

01/14/2016 7:00 am EST


James Pearce

Director of Research, Investing Daily

Income investors looking for high dividend yields may want to steer clear of energy stocks during 2016 until there is greater clarity as to the intermediate-term direction of oil prices, cautions Jim Pearce, director of portfolio strategy with Investing Daily.

In addition, highly levered businesses such as REITs and MLPs may also struggle as the Fed ratchets up interest rates a few more times.

So until all of that is over, consider looking for income from companies that have been abandoned by increasingly impatient growth investors more interested in appreciation than income.

Due to recent selling pressure in the PC hardware industry, you can pick up a 7% yield from data storage manufacturer Seagate Technology (STX) with little risk of a dividend cut in the near term.

The company is cash flow positive and carries nearly $2 billion in cash on its balance sheet.

Its share price dropped in half during 2015 as pricing for its data storage products became increasingly commoditized, despite exponential growth in cloud computing.

In addition to generating high income, Seagate’s share price should also rebound in 2016 as it earns a very high score of 8 (on a scale of 0-10) from my proprietary IDEAL Stock Rating System thanks to its high yield, growing cash flow, and low valuation based on forward earnings estimates.

If you think 2015 was a difficult year for the stock market, 2016 will be even tougher as investors adapt to a protracted rising interest rate environment for the first time in over thirty years.

With the Fed no longer pumping cash into the stock market (and effectively pulling cash out of the market via higher interest rates), it is these types of value stocks that will thrive in 2016 as investors shun overpriced momentum stocks in favor of inexpensive cash cows like Seagate.

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