Dividend Investing, Overcrowded by Yield Junkies, Grows Complex: 3%-Plus Yield at Emerson vs. Ampco-Pittsburgh
10-year Treasury rates, bank CD rates and all the time-tested risk-free income generators seem a cruel joke these days. And if the Fed’s Ben Bernanke is taken at his word this week – extremely low interest rates are required to spur economic growth and jobs for the foreseeable future – there’s no relief in sight.
That, of course, has sent savers scrambling for income elsewhere, and many have latched onto dividend-paying stocks as replacements for the instruments mentioned above. Stocks, of course, are far from a perfect replacement for guaranteed investments. There’s risk. And with all of these yield junkies on the scene, there is also scarcity, driving some dividend paying stocks up, and dividend yields down.
Say you're willing to settle for 3% or a bit better? You’ll likely either have to pay up – meaning a fairly steep PE ratio – or accept a company with warts. Like these two:
Emerson Electric’s (EMR) dividend yields 3.1% right now, but Emerson’s PE is 16 and change. Coverage on the dividend is good. And it’s a remarkably stable company, belonging to Standard & Poor’s Dividend Aristocrats list of companies that have raised their dividend for at least 25 years in a row.That kind of quality costs more.
Pardon the spaghetti chart but, truth is, this will only get you started.
We threw in the PE and payout ratio. And net income so you can more easily see the ups and downs of Emerson, a diversified manufacturer sometimes called a smaller version of General Electric (GE).
Then there’s Ampco-Pittsburg (AP), a specialty steel maker with a dividend yield currently at about 3.6%. Sound better? It also has a far lower PE, at about 10. So now it’s sounding like a bargain. Dividend coverage looks fine. But this is no Emerson. A far smaller company with more ups and downs. It’s not an Aristocrat. You’re getting a higher yield and paying a lower valuation because surprises happen in this business. The backlog of orders at year end, $260 million, was down more than one third from $397 million a year earlier. This year looks better in North America and Asia, but not so much in Europe.
Emerson and Ampco-Pittsburgh are both, in their own ways, fascinating companies. So by all means, before investing, read the latest 10-K and draw some YCharts of your own. You may be coming for the dividend, but you’ll own the stock.