Each is part of an unloved sector, but each has potential to for big returns if they return to favor.
There are pros and cons with cheap dividend stocks – and by “cheap”, I mean in absolute dollar terms. These are stocks generally below $10 per share.
The upside of cheap dividend stocks is that they are cheap on an absolute dollar basis, and have been sold off to a point where analysts and other investors lose interest. This is a good thing for the patient value investor. All of my biggest hits have come on stocks like these, where the market had to discover (or re-discover) them.
The downside is that cheap dividend stocks can languish for a very long time, and if you lack patience, or it takes years for them to make you big money, your annualized return may not be so hot.
I’ve found three cheap dividend stocks worthy of consideration, and that pay a robust dividend while you wait for them to recover.
Manhattan Bridge Capital (NASDAQ:LOAN) is the kind of company that either makes your rich, or could inflict a lot of pain. In case you don’t know, the Manhattan real estate market is on fire.
LOAN is a hard-money lender, one of my favorite kinds of businesses in which I have many colleagues. “Hard money” means cold, hard cash that the borrower immediately deploys. In this case, it is to finance the purchase and repair for real estate flipping, loans for new construction on small family homes, or bridge loans to buy rental properties.
The loans are not huge – from $50K to $1.4 million. They are interest only, with a first position lien and personal guarantees, and an LTV of 65%.
They have never had a default. Yet the market hates the stock because it fears that a rise in interest rates will harm LOAN’s spread. What the market doesn’t realize is that hard-money loans come with 10%+ interest rates. If borrowing rates rise for LOAN, they’ll pass those on to borrowers because this is a secondary lending market with pricing power.
It pays 9.9% in dividends, and at $2.79 per share, you have lots of upside if their loan volume spikes.
Niska Gas Storage Partners, LLC (NYSE:NKA) owns and develops midstream energy assets in the United States and Canada. It is the largest independent owner and operator of natural gas storage in North America. It is also struggling after this last quarter, due to maintenance and repair issues at some of its facilities.
This spooked investors because it pushed Cash Available for Distribution into negative numbers. The company still paid its quarterly dividend, but I think investors are worried that it cannot pay the full $1.40 (24.2% yield) going forward on an annual basis.
The company is evaluating its engineering issues and said it didn’t believe they would warrant large repair expenses.
So in this case, you have a choice. If you think things will work out, then you buy at $5.66 (which is 67% off its high) and assume that a dividend cut is priced in. If you want to wait and see, you could do so, possibly miss some upside, but then climb back into a company that has historically done well.
Gladstone Investment Corporation (NASDAQ:GAIN) is part of a sector that is under stress – Business Development Companies. These are companies that draw down debt, then turn around and lend it to small and midsized companies that are in need of secondary market-growth capital at mezzanine-level rates (low teens). They often take equity positions as well.
The fear among investors is that rates will rise and squeeze BDC margins. That is certainly possible, but as with Manhattan Bridge Capital, BDCs have some pricing power because they operate in the secondary market with limited competition. In addition, any actual increase in rates still seems to be quite some time off.
BDCs must pay 90% of income to shareholders, which GAIN does on a monthly basis. The yield is presently 8.6% and the $7.31 share price seems to have most of the risk baked in.
Lawrence Meyers does not own any security mentioned.
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