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8 Potential Bargain Dividend Stocks Down 15%+ Over The Last Year

A lot of people like to "cheer" for higher prices in the short term.

Yet, for the long-term net buyer, it's lower prices that can provide the ultimate benefit. This allows you to purchase more shares, which creates more income and a greater underlying earnings claim.

Personally, when I see lower prices, that's when I tend to get more interested. That's why I recently put out an article highlighting 8 dividend-paying securities that had declined in share price by at least 15% over the last year.

This article takes a deeper look at these same 8 securities.

All eight companies have kept their dividend payout the same or increased it in the last year, thus resulting in significantly higher dividend yields.

Here's a look at each of the eight securities highlighted, along with their respective share price declines from April 2015:

It doesn't always work out, but in my view, it makes for a lower "investment bar." That is, the companies don't have to perform as well as they had in the past, and investment returns could still be reasonable. This is fueled by the higher starting dividend yield to go along with a now lower valuation as well.

For this article, I'd like to expand upon those securities a bit. Let's begin.

Kohl's

Incidentally, I recently covered Kohl's here. If you have a bit of time and happen to be interested in the business, I'd recommend reading that post to get a fuller picture.

However, for this article, I can break down the basic points. Think of what follows as being a "Cliff's Notes" version of the original.

Basically, I'd consider the quality of the company to be "good" or else "very good," but not quite exceptional. It's not really in the same league as some of your dividend growth stalwarts out there.

However, the current valuation makes it a bit more interesting. Earnings have come down recently (6-20%, depending on whether you look at accounting or adjusted earnings), but so has the price. In fact, the price has come way down - more than 40% in the last year.

This has enabled some reasonable-looking components to start looking much more attractive. For instance, a year ago, the dividend yield sat at 2.4%. Based on a share price of just above $43, the current mark is closer to 4.6%. So, even if you don't have the same growth rate expectation, it's clear that the starting yield offers a "leg up." Even without growth, a 4.6% beginning yield is attractive in today's low rate environment.

Next, you have the valuation. Instead of a company trading at 18 times earnings, it's now closer to 11 or 12, depending on which earnings figure you look at. This has a couple of important ramifications.

First, whatever the future business growth happens to be, you stand a much better shot of capturing it with a security trading at 12 times earnings as compared to 18 times. The average earnings multiple for Kohl's over the past decade has been around 13. If the business does well but the P/E ratio goes from 18 to 13, investors don't get to capture that business performance, and indeed, could see capital depreciation. Alternatively, if the business performs marginally but goes from a P/E ratio of 12 to 13, investors stand to do just fine.

Perhaps just as important is the benefit of share repurchases at a lower rather than higher valuation. When a company utilizes share repurchases, it collects a portion of everyone's underlying earnings claim and then buys out some of the partners in the business. For the remaining shareholders, you'd much prefer for Kohl's to buy out past partners as a discount as compared to a premium. This allows the company to retire more shares and increases the per share growth as a result.

These things matter. In the link mentioned above, I go into detail demonstrating how 1.5% company-wide growth could turn into 8-10% annualized shareholder gains for today's investor. Effectively, the much lower share price makes future returns easier to formulate. This doesn't guarantee success, but it is the sort of thing that I like to look for in a potential partnership decision.

Union Pacific

If you think about the continental U.S. as a monopoly board, there are four major railroads: Union Pacific and BNSF in the west and Norfolk Southern and CSX in the east. Naturally, there are smaller track operators, but as far as the largest of railroads go, those are your options.

If I had to guess, those exact companies - or at the very least their underlying assets - will be around much longer than you or I. Although the tracks are not literally monopolies, the barriers to entry effectively make it so. Think about what it would require if you wanted to set up a competing route from, say, Cleveland to Miami or Los Angeles to Omaha.

Aside from the massive amounts of upfront capital that it would require, you'd be further stymied by getting approval to go through the backyards of thousands of properties. Moreover, you'd have to make the case that doing so would be in the best interest of all those parties. To be honest, I'm not sure if it could be done, and even if it could, I'm even more uncertain as to if you'd want to try. The infrastructure is already there.

That's the good news with railroads - the monopoly-like business model allows for reasonable economic rents to be collected. And often, it's a benefit to the consumer in the way of more efficient transportation.

There are a couple of things that I don't like as much about the industry. For one, even with an entrenched set of assets, it's still a highly capital-intensive business. Unlike say, Visa (NYSE:V), which might have to add some servers, with Union Pacific you have to manually repair and keep up thousands of miles of track each year.

This has an important effect. As Warren Buffett indicated in his most recent shareholder letter...


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