Cheap stocks are fun. We can buy a lot of shares without shelling out too much dough.
Cheap stocks are fun. We can buy a lot of shares without shelling out too much dough. Generally speaking, most single-digit stocks are “cheap for a reason”—they are losers. But we contrarians leave no discarded stone unturned. Especially in our search for dividends that we can retire on. There are a few inexpensive stocks that actually pay. And a select set of them that are even worth buying for their dividends. In a minute we’ll discuss five “economy lot” yield plays that pay from 6.3% to 11.8%. These are all single-digit share prices that sell for $9 or less today. But first let’s highlight a strategy from Fidelity that shows the fat returns we can bank from this bargain bin. The Fidelity Secret for 5,000%+ Returns Some high-profile funds specialize in low-priced stocks. Let’s consider Fidelity Low-Priced Stock (FLPSX). This fund, which launched in late 1989, was led by manager Joel Tillinghast and floated with stocks under $15 per share. Fast-forward more than 30 years, and Tillinghast has accumulated more than $33 billion in assets and rewarded his investors with 5,000%+ returns! FLPSX isn’t quite the renegade it once was, dealing more in midcaps nowadays, and raising its share-price threshold to $35. As with many of us, the wild days are behind FLPSX. Now it is a bit boring. In my opinion, it will pay to live on the investing edge in the months ahead. Small stocks have been slammed in 2021. The small cap index Russell 2000, for example, has already corrected by about 10%. It is bouncing back and, in my opinion, it’s just getting started. This action has been unfolding over the last five-and-a-half months after the Russell 2000 peaked on March 15. This “consolidation period” is a positive development. Since it is happening within the context of a broader-up move, it means the most likely resolution will be to the upside. Cheap Dividend Stocks Likely to Head Higher Picking low-priced stocks is about more than just picking stocks with low prices. We want good businesses with solid dividends and no “red flags” that may negatively impact the firm’s future cash flows. With this in mind, let’s consider a five-pack that sure looks interesting on paper. Annaly Capital Management NLY (NLY) Price: $8.69 Dividend Yield: 10.1% We’ll start with Annaly Capital Management (NLY), one of the largest mortgage real estate investment trusts (mREITs) on the market. A quick reminder: mREITs differ from traditional REITs in that they don’t own physical real estate—they own paper. Specifically, they raise funding across a variety of sources (common equity, preferreds, debt, repurchase agreements and more) to purchase mortgages and mortgage-backed securities, and profit on the net interest margin between the two. As for Annaly, it has used 10 different financing options to build a diversified portfolio of nearly $10 billion in unencumbered assets. The COVID pandemic might have been bad for REITs generally, but mREITs really took it on the chin. Massive volatility in interest rates caused investors to jump ship in all sorts of debt, and ensuing margin calls triggered a continued spiral in asset sales. Consider this: While the S&P 500 plunged 34% between Feb.19 and March 23 of 2020, the VanEck Vectors Mortgage REIT (MORT) MORT atrophied by nearly 65%. The space (and Annaly) have rebounded since, but there are reasons to be wary of NLY. For one, Annaly’s long-term history of underperformance against the mREIT space continues to rear its ugly head, with NLY’s recovery rally just not as robust as its peers.
