With major stock indices trading close to their all time high levels, this is not the best time to scout for value in the stock market. Stocks such as Alon USA Partners LP (NYSE:ALDW), Fifth Street Finance Corp. (NASDAQ:FSC), and PetroLogistics LP (NYSE:PDH) circumvent this by attractive dividends. Here is a closer look.
This one has been on a tear
Alon USA Partners LP (NYSE:ALDW) operates in the crude oil refining and petroleum products marketing business. The stock offers a staggering 23.5% dividend at a current market price of $25. The company’s journey on the stock exchange is relatively new as it was spun-off from Alon USA Energy only in November; however this brief history is impressive with 36% in gains so far. At current prices, the stock trades at 19 times its 2012 earnings while the debt equity ratio is capped at 1.23.
In the most recent quarter, Alon USA Partners LP (NYSE:ALDW) nearly doubled its earnings to $93.5 million. Apart from an impressive past, there are reasons to buy this stock from a future perspective. Although this high dividend yield may not be maintained in the future as a result of a surging stock price, the company is still expected to increase its payout.
Credit: Alon USA Partners LP (NYSE:ALDW)
With one of the most modern and flexible refineries, the company is on track to keep its high margins even in the event of lower processing volumes, which has happened in the most recent quarter as a result of scheduled maintenance and downtime. Alon USA Partners LP (NYSE:ALDW) represents a rare opportunity to capitalize on scarcity of transportation infrastructure in Permian Basin which is coupled with advantages of owning a captive distribution system.
Fundamentally solid
Fifth Street Finance Corp. (NASDAQ:FSC) is another high dividend paying stock. At the current price, its dividend yield works out to an impressive 11%. This investment firm generates profits by lending to and investing in small and mid-sized companies. Most recently, the company acquired Healthcare Finance Group – a specialized asset-based lender to clients in the healthcare industry. The company has a greater focus on debt investments which are secured by first or second priority liens on the assets of the portfolio companies.
As of March 31, 2013, nearly 96% of its fair value investments were in debt while the remaining were through equity investments. Analysts are positive on the stock and have ‘Hold’ or ‘Buy’ calls. Fundamentally, the stock looks attractive considering its forward price earnings ratio of 8.9. Other indicators, such as price to book value ratio at 1.05 and debt equity ratio of 0.35 are also indicative of hidden value that may be unlocked going forward.
PetroLogistics got chemistry
Another dividend champion which seems to have fallen off the radar is PetroLogistics LP (NYSE:PDH), which is involved in the lucrative business of propane processing. The stock has lost nearly 12% over the last quarter even after the company reported a profit of $57 million in the latest three months compared to a loss of $45.4 million in the same period a year ago. This points to a consistently improving operational performance at the company. However, shrinking revenue is one of the factors why investors have not looked at this stock more seriously lately.
Strong propylene prices offset the effect of lower volumes in the first quarter while softness in the price of propane – PetroLogistics LP (NYSE:PDH)’s primary feedstock – is likely to cushion margins in the quarters to come. The company offers a dividend yield of 21% while a debt equity ratio of 0.98 is not very high for a manufacturing business. Stifel has a price target of $15 on the stock, up nearly 20% from current levels.
Foolish bottom line
Overall, these stocks with strong dividend yields and still meaningful growth may be better for investors looking to spread their risks. High valuations mean the downside also increases for capital, but regular dividend streams can better equip investors to withstand a capital erosion scenario.
Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article When Value Goes for a Toss, Stick to Dividends originally appeared on Fool.com and is written by Jacob Wolinsky.
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