In investing, it rarely pays to buy the stock that everybody loves. If there's consensus around a businesses' stellar growth prospects and rock-solid balance sheet, shares are typically already expensive.
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On the other hand, unloved companies usually get that way for a good reason. The trick is to find a balance between stocks that are out of favor but also boast solid business models.
With that in mind, I ran a screen looking for stocks that Wall Street hates, as evidenced by significant bearish bets (short interest of over 15% of the float). A few names came up that have solid dividends that are well covered by earnings, making them worth income investors' consideration.
GameStop: 5.7% yield
GameStop has the highest yield of the group by far, but also comes with the heaviest baggage. The specialty retailer is navigating a disruption in its core video game business as players increasingly opt for digital purchases. There's no question that this is bad news for GameStop's profitable buy-sell-trade model.
Image source: Getty Images.
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However, CEO Paul Raines and his team have been preparing for this challenge for years, which is why they branched out into complementary business lines like cellular service, consumer electronics, and collectables. As a result, GameStop remains solidly profitable even as the used side of the business declines. Raines targets producing over half of earnings from segments other than traditional video game sales by 2019. Wall Street would rather wait until it's absolutely clear that this goal is achievable, but investors with a long time frame could do well to bet on this dividend stock before the clouds all part.
Harley-Davidson: 3.1% yield
Like GameStop, Harley-Davidson's yield is elevated thanks to a decline in the stock price. Shares are down almost 20% in the last year as its market share has slipped in the key U.S. geography. Increased competition has forced management to boost their marketing spending, pushing profitability down as a result: Operating margin fell to 21% of sales last quarter from 23% a year ago.
Its dividend is still well covered by its earnings production, though. Net income is running at an annual rate of about $3.70 per share compared to the $1.40 per share of dividend payments. That translates into a payout ratio of less than 40%. With such a hefty buffer, shareholders aren't likely to see a dramatic slowdown from the double-digit payout hike pace they've enjoyed lately.
Harley needs to find a way to reconnect with its U.S. consumers, and its latest sales growth uptick is a small step in the right direction. Meanwhile, healthy demand in international markets confirms that its iconic motorcycle brand enjoys strong appeal around the world.
Big Lots: 1.6% yield
Closeout retailer Big Lots has turned the corner. After a brutal spell of two full years of comparable-store sales declines, comps have been growing for nine straight quarters and just improved at their best pace since 2011. Investors cheered that success, along with the fact that executives raised their full-year profit growth target to a hefty 16%.
Image source: Big Lots.
Executives aim to keep the momentum going into the summer and fall through merchandising initiatives and a new private-label credit card. Longer term, they're investing heavily in a new online sales channel. Unlike most other national retailers, Big Lots has had no presence in e-commerce, until now. The online business is going to be a drag for the next few quarters, but could start contributing as much as a third of comps growth in the years to come.
Big Lots' forward price-to-earnings ratio of 15 marks a slight premium over Dividend Aristocrat Target , whose sales growth is headed in the opposite direction. Its payout ratio is far lower, though, (26% of earnings compared to 41%), which suggests investors might see more dividend growth from this off-price retailer than its more established rivals.
The article 3 Hated Dividend Stocks to Buy Now originally appeared on Fool.com.
Demitrios Kalogeropoulos owns shares of Harley-Davidson, Inc. The Motley Fool has the following options: short July 2016 $28 puts on GameStop. The Motley Fool recommends Big Lots. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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