Even in a time of rising rates, utility stocks have their place in a portfolio, as a form of diversi...
Look Beyond the Usual Dividend Suspects
05/15/2012 4:54 pm EST
The rush to dividend stocks has left some sectors overvalued, and in most cases, investors can do as well or better with strong stocks in fields less known for yield, says Hilary Kramer.
We’re here with Hilary Kramer and she is going to explain why we can look beyond the usual suspects and still find better value in the income market.
Well, every investor should be in an income dividend-yielding stock portfolio, especially as long as CDs and money markets pay literally close to nothing on your cash.
However, there has been such a rush into the utility stocks. It’s an overcrowded, overextended trade. What happens if some of these utilities, these regulatory boards in the next election, it becomes evident that there’s going to be rate restrictions and they’re regulated? At any time, the utilities could trade back down. I’ve seen the cycle.
What you want to be in as an investor are the stocks where the underlying asset value could rise 25% to 50% and you have a high 3% to 10% dividend yield. And there are so many of those stocks. Where you want to look is Europe.
Look at companies like Credit Suisse (CS). Credit Suisse, the stock, has been cut more than in half in the last 52 weeks. It’s down more than 50%, and you have a dividend yield of close to 5.4% for Credit Suisse.
Yet they still have assets under management, it's still a strong bank, a franchise that’s been around for hundreds of years. It really just came off in the process of the sovereign debt crisis in Europe and the overhang from the 2008-2009 financial meltdown that left a lot of bankers in the spotlight for maybe having sold too many of these CDO products.
But CS, that’s where you want to be, and you can see the stock itself rise. Even if the stock only goes up 5% in the next 12 months, you have another 5% plus on the dividend. Whereas you run the risk in a utility of it falling. Or the MLPs, it’s too much of a crowded trade right now. You want to own a smaller percentage of them.
Look at companies like Telefonica (TEF), formerly Telefonica de España. The dividend yield is close to 10%.
Where Telefonica has come off—because of course Spain has about 30% real unemployment—but Telefonica is actually the provider of telephone services, Internet data, high speed, as well as has branched off into other areas in telecommunications within Latin America.
Especially in Brazil, they are the name of the game, and have the market share through Vivo Participacoes and other companies in Brazil especially. But in the smaller countries, Telefonica is the operator and has the competitive advantage. Plus, Telefonica, of course, is strong in Spain as well.
Wait for a day where we have a 3% to 4% down day, maybe when the Greek situation comes to a head and there is literally a complete meltdown, and then you can pick up Telefonica instead of in the $17 range, maybe in the $15 or $14 range, and watch the stock go back up to $24 to $30 and you have this 10% dividend yield.
Of course, the dividend yield goes down as the price goes up, but you still could be in the 7% or 8% range and it’s not worth worrying about the withholding. If you buy a non-US stock, there is a taxation on that dividend that really comes in twice to you, but I’d still rather be taxed, let’s say 15% or 20%, but have a 10% dividend yield.
And there are many stocks to look at, including very strong ones in Europe that aren’t really breakdown stories, such as Credit Suisse and Telefonica.
You want to look at Sanofi (SNY), which was formerly Sanofi-Aventis, the French pharmaceutical company that specializes in vaccines, generic pharmaceuticals, animal health, branded medications, diabetes, diabetes therapeutics.
And Vodafone (VOD), you can’t go wrong. That should be a core holding in everyone’s portfolio. You’re going to have 4%-plus dividend yield in Vodafone. It’s one of the largest telecom operators in the world. It owns approximately 40% of Verizon Wireless (VZ). It’s a cash cow, well-managed. The stock should be higher, it’s just that again, and it’s a European player.
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