While it appears the Fed is getting set to throw an interest rate hike at the economy later this year, most strategists, including yours truly, see little chance of a rapid rise over the next 18-24 months. Investors will still need to contend with risk-free yields that hardly light the world on fire.
To compensate for the relative dearth of robust income, investors more and more are gravitating to equities with strong business fundamentals and competitive or superior payouts to those found elsewhere. This may be a prudent decision for many, but it has also driven up the valuations of companies that the market deems to possess durable and growing dividend potential.
Most do-it-yourself investors tend to look at large-cap companies with established businesses, large economic moats, and little likelihood of failure. Still, things do change, and one should not rest on their laurels and assume that nothing can wrong. Stocks present inherent capital risk and dividends are certainly not contractually guaranteed as opposed to bond or CD interest.
Given that there are literally thousands of companies that pay dividends, it can be difficult to narrow down choices. With a long-term frame of mind, it may be wise to consider names that are attractively valued due to near-term issues but have the potential to recover in time. Here are three ideas that fit that mold.
Exxon Mobil Corporation – With concerns continuing to surround companies exposed to the oil patch, now is probably as good a time as any to allocate capital to the behemoth integrated businesses whose yields have risen. Boasting a nearly 3.5% yield, Exxon would be my top choice for energy investors looking for a sleep well at night stock. While not exactly cheap, the stock is down over 15% from its highs hit last year. With the bit of a bounce in oil pricing, EPS estimates for Exxon and other oil majors will likely trend higher.
Diageo While the name is probably not that familiar, you’ve probably had one of their alcoholic beverages. Diageo’s notable brands include Captain Morgan Rum, Smirnoff Vokda, Johnnie Walker Whiskey, Tanqueray Gin, as well as Guiness and Red Stripe beers, just to name a few. Yielding nearly 3%, the company’s stock price has treaded water for some time now due to competitive forces that have impacted pricing and profits. Still, the world likes its booze and over the long haul, Diageo’s market leading position should enable renewed growth. The stock has bounced nearly 10% near-term on takeover rumors which I doubt will come to fruition.
United Parcel Service – Despite the influx of business due to e-commerce channels, the world’s largest delivery company has struggled over the near-term, with a very disappointing 2014 holiday season. While I don’t think the company’s problems will be solved immediately, you get paid 3% to wait. Its competitor Fedex may present the better total return opportunity going forward, but its yield is only .57% at latest trades. My guess is that the market wants to see how UPS fares this holiday season before committing to it. If it performs to expectations, I see a nice 12 month return in store.
Companies with temporary, fixable issues often times present the best return opportunities for patient investors. Exxon, Diageo, and UPS are all what I consider contrarian equity-income opportunities at the moment. While I wouldn’t expect any snap back rallies, with all three trading well off their highs, now is a good time to consider investing in them. As the companies adjust to the specific, unique problems that they are dealing with, profit growth should return and stock price growth should return as well.
Adam Aloisi was long XOM, DEO, and UPS at time of writing, but positions can change at any time.
Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.