By their nature, turnaround stocks involve a fair amount of risk. One way to help reduce that risk is to find out-of-favor stocks that offer high dividend yields, suggests George Putnam, editor of The Turnaround Letter.
This puts hard cash in your pocket while you wait for the turnaround to take effect. The benefits of these dividends can be significant: for a three-year turnaround, a stock paying a 5% dividend will produce a 15% cash payback even if the stock goes nowhere for a while.
Because a high yield often implies some skepticism that the dividend can be maintained, prospective investors should be selective, emphasizing those companies with a solid commitment and ability to sustain their dividend.
More from George Putnam: Biogen: Buybacks and Biotech
Listed below are some out-of-favor stocks that have high dividend yields which we believe are sustainable and also have turnaround potential:
Shares of the world’s largest communications company have languished for over 15 years and currently are well below their highs. Unlike its arch-rival Verizon (VZ), AT&T has chosen to aggressively diversify into media, entertainment and technology businesses, most recently with their purchase of TimeWarner.
While offering a promising future, the expansion has left the company with an enormous $171 billion debt balance. However, AT&T should generate over $28 billion of free cash flow in 2018, providing plenty of cash to pay down some debt and cover the dividend. Trading at 7.4x EBITDA, AT&T’s shares and yield are attractive.
Dow Chemical (DOW)
Dow shares have remained weak since the conclusion of the complicated and protracted merger and 3-way break-up of Dow and DuPont. Dow produces a broad range of commodity and specialty chemicals that provide it with stable (but slow-growing) revenues yet strong free cash flow.
Investor worries include the difficult pricing environment and a possible recession. However, the company’s sizeable cost-cutting program, debt paydown plans and healthy dividend coverage, along with an attractive valuation, make Dow an appealing stock.
Enterprise Products Partners (EPD)
This company is considered one of the highest quality pipeline, storage and export facilities companies for oil, natural gas, refined products and chemicals. Its 49,000 miles of pipes and related infrastructure are a critical component of the nation’s energy backbone.
Most of its revenues are fee-based, helping insulate it from commodity price changes. Its respected management team has produced steady, well-covered dividend growth over the past 20 years while maintaining below-average debt levels.
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