3 High Yield Stocks to Buy, 2 to Avoid
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some people have trouble picking profitable stock. While everyone wants to be Warren Buffett, not all traders have a strong formula for picking big gainers. The good news is that dividend stocks offer investors the opportunity to select shares in companies that make regular payments; some of these payments can be quite impressive when compared to their share price. Five high yielders to consider buying now are Frontier Communications Company (NASDAQ: FTR), Annaly Capital Management Inc (NYSE: NLY), RR Donnelley & Sons Company (NYSE:RRD), Windstream Corporation (NASDAQ: WIN) and CenturyLink, Inc (NYSE: CTL).
Frontier Communications Company
Connecticut-based Frontier Communications is a communications firm that specializes in voice, data, and video services for US customers in the residential and business sectors. This $4.2 billion company not only gives investors the potential of price gains; it also pays some huge dividends.
Trading just over $4 per share, Frontier boasts a hefty 17% yield at $0.75. There are some concerns with quarterly earnings that tumbled 30% last year, but this stock has other metrics that suggest it is still a good buy. A one-year target estimate of $6.61 offers the possibility of a 60% gain in share price; its price to earnings ratio of 26 and beta of 0.65 both suggest continued growth, as does the aggressive purchase of Frontier stock by insiders. With solid potential and a wonderful yield, this is a nice stock to consider purchasing.
Annaly Capital Management Inc
Incorporated in 1996, Annaly Capital Management operates as a real estate investment trust headquartered in New York. REITs have long been seen as good investments, since they must pay at least 90% of their taxable income in the form of dividends. This has made them quite popular investment vehicles, and Annaly is no exception. One of the biggest REITs around, Annaly’s yield of 13.6% (dividend of $2.28) is excellent when compared to competitors like Redwood Trust Inc (RWT) (8.6% yield) or Impac Mortgage Holdings (IMH), which doesn’t pay a dividend at all.
The good news for investors in Annaly Capital is that not only is the company paying dividends, it is enjoying share price increases as well. Currently trading around $16.75 per share, the stock has a one-year target estimate of $17.45. The company has a price to earnings ratio of 12.35, and its low beta of 0.31 suggests the ability to sustain growth. If the company can maintain its dividend payout and post even modest gains in share price, this could be a very good company to hold.
RR Donnelley & Sons Co
Chicago-based RR Donnelley & Sons is another solid company that offers the potential of a big return for investors. Specializing in the areas of printing, logistics, and business process outsourcing products and services, the company has a reputation as a high yielder. The good news for investors is that it also looks primed to be a great growth stock in 2012. Currently trading close to $11.50 per share, its one-year target is a whopping $19.25, an impressive potential return of nearly 70%.
RR Donnelley isn’t just generating increases in share price; the company is best known for its dividends. Offering a very strong 9% yield with a $1.04 annual dividend, it is riding a quarterly earnings growth of nearly 200% to make this stock appealing. Although the company only has a forward price to earnings ratio of 6.5, this is still a stock that investors should seriously consider for new or increased positions.
Representing the telecommunications sector, Windstream Corp from Little Rock, AK is another high-dividend company that merits consideration for purchase. This $6.2 billion company has been a solid dividend source ($1 annual dividend with a 8.3% yield), but there are reasons to be concerned going forward, such as its tumbling quarterly earnings (down 16%) and its cumbersome payout ratio of 192%.
In spite of the doubts, Windstream is trading at a volume of nearly 4 million shares. Currently trading around $12 per share, it has growth potential as evidenced by its one-year target of $13.50. In addition, the company has a price to earnings ratio of 23 and a very good levered free cash flow of nearly $440 million. The concerns around its earnings and payout ratio are troublesome, and it might be best not to initiate a new position without doing additional research.
Another player in the telecom market, CenturyLink Inc is the third largest provider in the United States; it offers voice, Internet, data, and video services from its headquarters in Monroe, Louisiana. Another high-yielding stock, CenturyLink is currently trading at nearly $37 per share, with a dividend of $2.90 and a yield of 7.8%.
The concerns associated with Windstream Corp apply to CenturyLink as well; that being a quarterly earnings decline of 40% and a payout ratio of 158%. In addition, the company is seeing an increasing number of short shares, with 5.6% (15.14 million) of its float being sold short. While its quarterly revenue growth was an impressive 162%, and it has over $3 billion in free cash flow, investors should be slow to take positions without additional investigating.
Taking Advantage of Big Yields
High-yield stocks can offer a stabilizing effect to a portfolio. Dividend-paying companies provide a source of income that is less likely to be affected by emotional trading and ups and downs in the market. Investors looking to add a high yielder in the short-term should consider Frontier Communications Company, Annaly Capital Management Inc and RR Donnelley & Sons Company. Windstream Corporation and CenturyLink Inc, because of their weak earnings and high payouts, are both companies that investors should be slow to consider new positions.
The Motley Fool owns shares of Annaly Capital Management. IUMFool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.