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Sometimes a major selloff offers a great buying opportunity, but a lot of times it can offer a rare occasion to invest in a boosted dividend yield.
There are special cases when great companies are punished due to near-term issues or bad publicity.
Most investors consider these huge selloffs as opportunities for value investors. However, it can also be great for income investors. Overreactions provide great opportunities to buy solid dividend payers at a cheap price.
Many selloffs are a result of short-term issues that don’t fundamentally impact the long-term story. These can include product recalls, deadly disasters or budget cuts (think budget sequestration).
General Motors (NYSE: GM), down nearly 20% year-to-date, is a great example. The company has been pressured from various vehicle recalls. However, this doesn’t appear to be fundamentally affecting the longer-term story.
Wall Street has a $42.50 average price target for General Motors, which is 30% higher than where it trades today. Meanwhile, it’s offering investors a 3.6% dividend yield.
Carnival (NYSE: CCL) is another example. The sinking of the Costa Concordia cruise ship in 2012, resulting in the loss of 32 lives, was tragic.
But investors who bought Carnival shares during the media noise would have a dividend yield of 3.3% based on their cost basis — versus the current dividend yield of 2.5%. That’s not to mention a 32% rise in the stock price since then.
Investing is as much an emotional game as it an analytical one. It’s easy to get caught up in the hype and bad publicity. But level-headed investors can find great dividend opportunities trading for cheap. Here are the 3 beaten-down stocks with fat dividend yields:
Beaten-Down Stock No. 1: SeaWorld Entertainment (NASDAQ: SEAS)
SeaWorld is one of the major theme park operators in the U.S., with 11 parks across the SeaWorld and Busch Gardens brands. Shares of SeaWorld have fallen 24% over the last month. Before the selloff, SeaWorld sported a dividend yield of just under 3%; it’s now upwards of 4%.
Last month, the company released results for the first half of 2014 that were well below expectations, in part due to lower attendance — believed to be caused by the Blackfish documentary.
SeaWorld is a now focusing on rebuilding its brand. It’s embarked on a media campaign, including TV commercials that will highlight SeaWorld trainers. It’s also planning to expand its killer whale environment in its San Diego park. SeaWorld also has undeveloped land in Texas and Virginia that it could use to increase its presence in the theme park market or add hotel rooms.
Reputation issues aren’t easily overcome, but publicity nightmares happen with some frequency. Recall the latest death on a Six Flags’ roller coaster, in Texas during 2013. Shares of the theme park operator have moved higher since then.
Beaten-Down Stock No. 2: Las Vegas Sands (NYSE: LVS)
This casino operator, with an unprecedented presence in the fast-growing Macau region, is down 22% year to date. At the start of the summer, shares were yielding under 2%. It now offers a 3.3% dividend yield.
Las Vegas Sands has been pressured due to continued weakness in Macau. Traffic to Macau has indeed fallen year-to-date, but Las Vegas Sands is still performing nicely in the region. It grew its market share in Macau from 29% in July to 32% in August.
Macau is still the largest gaming destination in the world, and Las Vegas Sands generates 80% of its revenues from its Macau operations. It’s also planning to open another resort, the Sands Cotai Central, on the Macau strip. However, over the long term, Las Vegas Sands remains a growth story, with some of the best exposure to the rising middle class in Asia.
Japan is still closed to casino gambling. However, the need for more tourism and tax revenues could change this very soon. Las Vegas Sands should be a frontrunner for breaking ground there.
Beaten-Down Stock No. 3: BP PLC (NYSE: BP)
At the start of July, BP had a 4.3% dividend yield. But with the selloff over the past three months, in which its share price dropped 10%, its yield is up to 5.1%. Trading at a P/E ratio of just 12.5, its valuation is also very attractive.
The selloff comes as litigation concerns related to the Deepwater Horizon incident of 2010 resurfaced. The company was found “grossly” negligent for its role in the Gulf disaster, as opposed to just negligent. That means the ultimate fines could be more than expected. However, BP can contest the ruling. BP remains an enticing long-term investment with a superior dividend yield.
In an effort to streamline its operations, BP is selling off non-core assets. This has also boosted its balance sheet. Over the last three years, the company has managed to lower its net debt (debt less cash) by 30%. It now has some $27 billion in cash.
It’s a double whammy when investors can invest in stocks on the cheap after a huge selloff, but it gets even better when investors get a chance to own these stocks when dividend yields are near record highs. That’s just what the three stocks above are offering.
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