Looking For Yield In All the Wrong Places

Dividend yield is not an important factor in my version of value investing. My focus is on total return. “Chasing yield” is a common investing error.

Promising an extra 200 basis points in yield is the source of more investment frauds, than all other fraud sources combined. I think the recent crypto frauds fit in this category. I stress valuation first, with yield a nice extra if you can find it.

With that warning firmly in mind, I approach this group of stocks with dividend yields over 5% very carefully. In some ways, it is almost its own investing universe. With the 2 year T-bond yielding over 4%, some of these stocks are getting more interesting. Over the last 10 years, many of these stocks traded at premiums I found too rich.

I started with the boring Universal Corp, yielding 6%, at 15x earnings, as my “king of the hill”. UVV is a reasonable idea. They are the middleman between tobacco farmers and producers. The business is difficult to decipher. Earnings swings are constant. I would prefer to buy it after a bad quarter. Right now, it is just a solid stock.

I found several ideas better than UVV, let me rank them here;

1. Verizon - VZ - $40 - I had not looked at this stock in 10 years, and was very surprised by what I found. This is classic value story. Wall Street hates all their capital spending and few buybacks. This is exactly what I like to find, companies making long term investments. The problem is they report tomorrow morning, and the stock is “acting” like their 2023 guidance will be disappointing. Let’s watch, I am hoping for a real buying opportunity. My guess is we will get it. I hate recommending $150+ billion market cap stocks, but sometimes they are too cheap to ignore. I really prefer VZ, to the ailing ATT.

2. Williams Companies - WMB - $32 - 5.5% yield - This is by far my favorite pipeline stock. This is a very complex industry, with many difficult regulatory issues. WMB would have been one of my model portfolio stocks, but I am concerned about new members of the FERC halting new projects. More work is needed here. I do not trust the guys at Energy Transfer or Kinder Morgan.

3. Magellan Midstream Partners MLP - MMP - $54 - 8% - I really wanted to avoid the MLP’s, but I found this one interesting, They transport gasoline and crude oil. It is almost the perfect anti-electric car stock. The company has done a great job with capital allocation. I hate the MLP structure, it causes under investment. Maybe MMP is better than buying a utility.

4. Philip Morris International - PM - $101 - 5%. I quickly dismissed the high yielding (8%) Altria. They have made too many mistakes. PM has done a nice job and needs more analysis. This is a complex global business. I am not sure I could ever understand this company, but I want to learn more.

5. Xerox - XRX - $17 - 6% yield - I am really embarrassed to even mention this stock, but my one hour analysis found enough interesting stuff. Carl Ichan called this the worst managed company he has ever seen, but he still owns 20%. Can you figure that out? XRX controls a good part of what is left of the corporate printing business. I am skeptical, but mildly intrigued.

6. Kohl’s - KSS - $33 - 6.5% yield - I prefer Nordstrom, otherwise I would want to do more work. I am worried about short-term issues. I have avoided this stock for 10 years, and that has been generally correct. Their coupon business creates an almost cult like following.

7. Universal - UVV - $53 - 6% - 6 ideas were better.

8. VF Corp. - VFC - $30 - 7% - I fear the management change will be a good excuse for a dividend cut. The brands are OK, but I am not sure of the upside.

9. Newell - NWL - $16 - 6% - New CFO is making some needed cuts. I am worried there has been under investment in these brands for years. I worry about the safety of the dividend.

10. Leggett & Platt - $35 - 5% - Earnings have been stuck around $2.50 for a long time. Maybe at the bottom of the housing cycle, I could get more excited.

11. Lazard - LAZ - $40 - 5% - If you must own a financial, then this stock might work. They have a unique franchise in some international markets. This is historically a penny pinching group, that several good value investors own. If I were more bullish, I would be more interested.

12. Rio Tinto - RIO - $79 - 8.7% - I will pass on Chinese iron ore concerns, but these guys are great operators. I wish I knew the dividend history better.

13. B&G Foods - BGS - I like the underlying business, but another dividend cut seems inevitable.

14. Cracker Barrel - CBRL - $111 - 5% - I skipped over these guys when I did restaurants. The food is OK, but sometimes it can be hard to get a seat. Making me wait, hoping I will buy something in the gift shop, is infuriating. This is almost a travel stock rather than a restaurant, pass for now.

15. Hanesbrands - HBI - $8 - 7.5% - I have watched for many years, and never really found anything I liked. There is just too much debt to be manageable.

16. There are dozens more. Many are MLP’s, or over-leveraged, or both, REIT’s is a whole other story best left for another day.

I am excited to watch VZ tomorrow morning. Let’s hope for the worst.