3 Dividend Payers on Fire Sale

Here are three stock ideas for value and dividend investors. All three are cheap by most measures.

Cliffs Natural Resources (CLF)

Cliffs is an iron ore miner. Iron ore price is low due to low demand, especially from China, which for years has been the top buyer of iron ore. Cliffs is currently yielding north of 6%. They more than doubled their dividends back in April 2012. CLF is trading at close to book value of estimated available resources and a P/E of just 6.

Risks and Opportunities. Should demand for iron ore pick up again, CLF will benefit. However, prices can stay low for a long time, or even go lower. There's a ton of pessimism around miners in general and specifically around iron one. Prices are sensitive to China's economy as well as a global economic recovery. The silver lining is that China's own sources of iron ore are of very low quality and as such once China is back at building its infrastructure full steam, they will have to buy good quality iron ore from one of the global producers and so CLF's boat will be lifted with the high tide.

Investment Thesis. CLF is a risky bet, but one that could payoff handsomely for a patient investor. Meanwhile, should they continue to pay dividends, there's nothing to complain about the current yield. Demand has to pick up again, eventually. Timing is key though -- now could be early to invest and they could remain depressed for years and even trim the dividend. I recently started a position and am currently adding to it on pull backs. Look for prices below $36.

Intel (INTC)

Intel is a juggernaut in microprocessor and chipset manufacturing and a leader of its group. It's currently yielding 4.6% and has paid dividends for decades and raised it for the last 9 years. Its 9-year compounded annual return based solely on its dividend growth has been 27%. The stock price has not followed accordingly, but their earnings did just as well, with a compounded annualized return of 20% for the same period. With a historic low P/E of just 9, it's currently offering a juicy dividend on the cheap.

Risks and Opportunities. Intel has missed the mobile wave so far as most cell phones and tablets out in the market do not use Intel's technology. This trend is dangerous for Intel, but I believe fears are exaggerated for a couple of reasons. 1) Intel has always caught up to competition even when it wasn't the leader. Almost a decade ago, AMD had better performing, lower cost and lower power chips than Intel, but Intel managed to catch up and dominate again. It's highly dubious Intel won't produce an ARM-like chip for cellphones and tablets. 2) Tablets and cellphones are becoming more compute-hungry and that brings the market closer to Intel's turf. 3) It's misguided to think that mobile computers replace big computers. That might be true at home and office, with tablets replacing desktops, but for every few cellphones and tablets a big server must exist in the cloud somewhere. Datacenters are the playground of Intel and these are constantly growing. Demand will not go away for big and powerful chips.

Investment Thesis. Intel is a clear winner. It has traded for a large premium for a very long time. Its best days are still ahead of it and current low prices are bound to disappear. I recently started a position and am still adding to it, mostly via at-the-money naked put options. Prices below $20-21 offer the greatest returns and yield.

Entergy Corporation (ETR)

Entergy is an electric and gas utility in the northeast and midwest. Entergy has paid dividends for decades, raised it most years and bought back its own stock at various times in the past years. It's currently yielding 5.3% and has a P/E of 16. It has grown dividends a compounded annual rate of 9% over the last 10 years and its earnings have appreciated by a similar amount.

Risks and Opportunities. With the global slowdown, ETR has suffered too. Demand for energy has weakened, especially in the industry-heavy midwest. However, growth and energy are synonymous -- as one cannot happen sustainably without the other. Once growth returns, ETR will continue to prosper. It's currently the cheapest it's been in many years, approaching levels not seen since 2004 and some brief moments during the 2008-2009 crisis.

Investment Thesis. I have been following ETR for years and have never made a move due to its relatively rich valuation. I believe this current weakness is temporary (a mere reflection of the poor state of the world's economy) and its fundamentals have not changed. I've started a position at around $63 and am looking to add more at this level or below.

Final words

CLF is the riskiest of the three, but also offers the most potential upside. Invest carefully and with a long-term view. INTC and ETR offer the most down side protection, especially ETR, which is as stable as utilities come. INTC offers good down side protection, but as with all technology leaders, watching for new developments is crucial. Should it fail miserably to make inroads into mobile devices or see its lead in the server market erode, things could turn south fast. I put the odds of that happening at low, though.

Disclaimers: This is not intended as financial advice. Do your own homework and consult your financial adviser. I own all three stocks mentioned above.


  1. Great Write up!!!

    Intel just worries me because they have no mobile strong hold. Also, the new streaming tv service out of Intel seems like some confused leadership.

    Plus software is eating the world. (http://online.wsj.com/article/SB10001424053111903480904576512250915629460.html) not sure intel is the greatest at software.

    At this point I would not be worried about Intel cutting a dividend but I would be worry about the dividend growth in the future.

    Will keep CLF and ETR on my watch list.

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