“Cheap” stocks aren’t necessarily the best cheap stocks to buy. And dividend stocks, even those with a high payout, aren’t necessarily safe. A low share price attracts some investors. So does a high dividend. But both can actually be signs of danger.
After all, a stock under $10 almost always has declined a long way to get to that point. And dividend stocks usually offer high yields because investors believe those dividends will either grow slowly or be cut. In recent years, the likes of General Electric (NYSE:GE) and Anheuser-Busch InBev (NYSE:BUD) have proven how devastating a dividend cut can be.
That said, there are dividend stocks to buy under $10 — and here are three of them. Again, all three have real risks which investors should consider. But all three have real rewards, too, that go beyond income.
Dividend Stocks to Buy: Ford (F)
Dividend Yield: 6.6%
I turned bullish on Ford (NYSE:F) last year — and so far that call hasn’t worked out. Including dividends, investors in F stock have roughly broken even over the past 15 months. In a rising broad market, that’s hardly cause for celebration.
But I’m not ready to give up on F stock just yet, and I don’t believe investors should either. The company’s decision to focus on pickups and SUVs over coupes and sedans will save on both operating and capital expenses, and concentrates the remaining resources where the company has an edge. Ford is working on both electric and autonomous vehicles, even if for now it’s behind Tesla (NASDAQ:TSLA) in EVs and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) in self-driving cars. Cash flow and earnings are mostly holding up, yet F stock trades at just 7 times earnings and yields over 6%.
To be sure, the risks are real. Shares of both Ford and rival General Motors (NYSE:GM) have been dogged by “peak auto” concerns, and Ford needs some success in EVs or AVs to drive upside. The economy will turn at some point, further pressuring new car demand. The company’s decision to abandon smaller car production also leaves it vulnerable to any oil price shocks, as its lower-mileage fleet will see higher cost of ownership.
This is not a perfect story, and there are reasons why F stock is yielding 6.6%. And this is not a stock that can be bought just for that yield under the impression that it’s “safe.” That said, the rewards here are tremendous. As it grows, Ford can achieve EPS over $1.50 and reach a share price easily above $15. It may well turn out to be the case that Ford stock, below $10, is too cheap.
New Media (NEWM)
Dividend Yield: 20%
The risk to New Media (NYSE:NEWM) is obvious. The company is a leveraged newspaper operator. Its debt load will increase further assuming the company’s pending acquisition of Gannett (NYSE:GCI) goes through, as appears likely at the moment.
NEWM stock does have a seemingly amazing 20% yield. But, here, too, investors can’t buy the stock thinking that yield is safe. It’s not. New Media plans to cut its dividend in half after the acquisition. And even so far, the yield hasn’t been a true payout. New Media has funded the dividend through equity offerings, meaning that investors are receiving cash for their shares — but also owning steadily smaller portions of the company as those shares are diluted.
Indeed, at $11, I highlighted NEWM as one of the dangerous dividend stocks to avoid. The dividend cut and subsequent share price decline show why that was the case.
Those caveats understood, however, there’s an intriguing case below $8. The acquisition should create tremendous cost savings. The company’s local advertising units — ReachLocal for Gannett, UpCurve for New Media — have value. Management targets suggest the stock is trading at something like 3 times cash flow pro forma for the merger, and real equity value can be created if the company (as it plans to) aggressively pays down debt with that free cash flow.
Again, investors can’t believe the 10% yield on the way, let alone the 20% yield currently shown, is safe. It’s not. The newspaper industry has been in decline, and the Gannett acquisition is the culmination of a highly risky roll-up strategy executed by New Media. But if the company can even come close to achieving its post-merger goals, the yield should be buttressed by upside.
Acco Brands (ACCO)
Dividend Yield: 2.8%
Like NEWM stock, the risk to Acco Brands (NYSE:ACCO) is obvious. Acco too serves a potentially declining industry, as the company manufactures school supplies like notebooks, calendars and three-ring binders. Demand is fading on both the business and consumer side, and may well fade going forward.
But ACCO stock can’t be written off just yet. Excluding a negative impact from currency and a modest boost from acquisitions, revenue actually increased in the company’s most recent quarter. ACCO just raised its dividend by more than 8%, and ACCO stock now yields 2.8%.
And at 7 times forward earnings, dividend growth isn’t priced in. In fact, stable profits aren’t priced in. If ACCO stock can keep delivering even something close to flat results, a share price above $10 plus the dividend should yield double-digit annual returns. That’s nothing to sneeze at, even if ACCO hardly seems like the kind of stock with that level of potential.
As of this writing, Vince Martin has no positions in any securities mentioned.