In this crazy stock market with extreme volatility and sensitivity, I re-examined my income producing stock strategy and realized there may be a different approach to earning great dividends while waiting for good companies to recover some value in great industries. Let’s take a look. First, let’s look at some assumptions. This is what I came up with:
- The oil industry in America will eventually recover
- Interest rates will eventually go up
- Health care demand will continue to grow
- Real estate, over time, will continue to grow in value
- Autos will continue set sales records due to the pent up demand since 2008
Given this scenario, I purchased these five dividend producing stocks. Here I list what I bought, why I bought it and the expected return, both in terms of dividends and long term value.
Stock # 1: Kinder Morgan, KMI, $29.40/share, 6.7% Dividend Yield. I expect the price of oil, natural gas and CO2 to normalize over the next 18 months, which could bring the price per share back into the $40/share range for a 30% upside.
Stock #2: Medical Properties Inc, REIT, MPW, $11.55/share, 7.7% Dividend Yield. I expect health care and the need for hospitals to be in increasing demand, in America and abroad. Yes, interest rates raising may put negative pressure on the stock but a 35% forecasted growth rate in assets could bring a stock price upside of 25%.
Stock #3: General Motors, GM, $29.40/share, 4.9% Dividend Yield. With the pent up demand for autos, the currently low oil prices, and GM’s strong position in high margin SUV’s and trucks, I expect GM to return to historical PE levels (10.8) which gives the stock a 48% upside.
Stock #4: Southern Co, SO, $29/share, 4.99% Dividend Yield. With the recent conversions to natural gas and looming interest rate hikes, this stock has upside of 5-7% annually.
Stock #5: Wells Fargo, WFC, $51.40/share, 2.87% Dividend Yield. With interest rate increases expected, this stock could return to its historical PE ratio (16.2) which gives the stock a potential 32% upside.
There you have it. It is a portfolio that returns an average 5.5% dividend yield and a significant stock share price upside if you believe the assumptions listed above and have the time to wait for each catalyst to materialize.
What do you think?