5 Solid Stocks with Big Yields

04/08/2011 9:49 am EST

Focus: STOCKS

Adrian Day

Chairman and CEO, Adrian Day Asset Management

You can find good dividends all over the world, but they need to come from companies that have solid balance sheets and growth prospects. In this exclusive interview with MoneyShow.com, Adrian Day of Adrian Day Asset Management shares five stocks he'd buy even without dividends, but which all offer strong yields anyway.

Adrian, everybody wants to have income. What would you suggest investors look for?

Well, I’m a great fan of dividends, because as they say, dividends don’t lie.

I do think there are a few things you need to watch out for, though. You need to make sure that the dividends are coming out of earnings. You don’t want a company that is going out borrowing money, as companies have done—borrow money in order to pay a dividend.

To me, the consistency of a dividend is perhaps less important than the fact that they’re actually earning the dividend. You know, right now with interest rates so low, a lot of investors are sort of scouring the paper and the internet looking for high dividends. I think that’s a mistake.

Why?

Because typically, if you have a dividend yield that is that much higher than everybody else in that sector is paying, it is probably a sign that there is some trouble coming.

And it could be the fact that the price of the stock is in trouble.

That the price has gone down so low, and there’s a reason the price has gone down so low. So my No. 1 rule in dividend investing is, I never buy anything for a dividend if I wouldn’t buy it otherwise.

I want to like the company. I want to like its growth prospects. I want to like the management, and think it’s cheap. Now, a dividend is like icing on the cake. A dividend is a reinforcement, if you like, of the fundamental purchase.

And you can get good dividends everywhere. I mean, I’m looking for dividends in three places right now.

Number one would be US high-dividend stocks—and in particular, I like the business-development companies, companies that lend money to small businesses. They don’t pay tax at the corporate level, so they pass it all through to shareholders.

An example would be Gladstone Capital (GLAD), which is trading a little over $11, yielding about 7.5%. That is a very, very nice dividend from a very conservative company in the current environment.

Secondly, I look at global blue chips. Some of the yields are lower, but some of those have attractive dividends right now.

A company like Nestle (NSRGY), for example. This is a food company that everybody knows, yielding 3.1%. Not as nice as 7.5%, but still a very, very nice dividend. Or Unilever (UL), the Anglo-Dutch food company yielding about 4.5%.

And then the third area I’m looking might surprise some people: I’m looking at emerging markets.

Look at a company like Kingsmen Creatives (KMNCF), which creates and designs booths and exhibits for museums and fairs. It's yielding over 6% right now, with a P/E of only 7. Great balance sheet, no debt.

Or a company like Bradesco (BBD), which is one of Brazil’s largest banks, yielding about 3.5% right now. Great company, great balance sheet. So, you know, those are the areas that I look for dividends, and you can find dividends all over the world.

But you want to have, not just dividends, but really good solid companies.

Oh, I would buy all of the companies I just mentioned if they didn’t pay a dividend.

Adrian, do you own any of the stocks that you just mentioned?

Yeah, we own them all for our clients. I mean, I eat my own cooking.

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