Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Recently, while speaking at a conference in Tokyo, I told the audience that the bear market of 2022 was the best thing to happen to income investors in a long time.
Not only did rising interest rates make it possible to finally earn a decent yield on fixed income investments, but depressed stock prices pushed yields higher too.
As a result, today you can pick up some terrific, high-quality companies at a discount to where they were trading a year ago, despite growing earnings.
And the best part is you’ll earn a strong dividend yield.
Let’s take a look at a few dividend stocks now trading at a discount.
Bank of Montreal (NYSE: BMO)
A year ago, if you’d bought shares of Bank of Montreal, you’d have forked over around $120 per share. Now, you’ll pay less than $100.
Take a look at the chart below, and you’ll see that you’re buying the shares for about 20% less than investors paid just 12 months ago.
And even better, the prospects for the bank have improved!
As we are all aware, in 2022, the Fed embarked on an aggressive agenda to raise the federal funds rate.
It’s easy to forget that the Fed was holding the federal funds rate at around zero as recently as the first quarter of 2022.
But once the Fed decided it was time to do something about inflation, it moved forcefully… raising the rate from around 0.25% to around 4.25%.
Interest rates and bank profitability are connected, with banks benefiting from higher interest rates. The huge increase in interest rates in 2022 is already helping Bank of Montreal’s bottom line.
Just take a look at the fourth quarter 2022 earnings compared with fourth quarter 2021 earnings…
Fourth quarter 2022 net income increased by more than 100% from $2.14 million to $4.48 million. Earnings per share skyrocketed 101% from $3.23 to $6.51.
That’s providing the bank the ability to raise the dividend. The first quarter 2023 dividend was increased to $1.43 per share. That’s an 8% increase from one year ago.
Meanwhile, with a price-to-earnings (P/E) ratio of 9, it’s trading 15% below its five-year average P/E.
The stock yields a juicy 5.9% currently. If you’d bought it a year ago, you’d be earning a 4.8% yield.
And keep in mind the Fed isn’t finished raising rates.
Take advantage of this bargain.
Here’s another one…
Global Ship Lease (NYSE: GSL)
Based in London, Global Ship Lease owns and charters container ships of various sizes to shipping companies.
This is another company trending in the right direction and flying below Wall Street’s radar.
As the global economy reopens from the COVID-19 pandemic, Global Ship Lease is benefiting.
For the third quarter of 2022, the company reported revenue of $172.5 million, an increase of 24.5% from $138.6 million in the third quarter of 2021. Earnings per share for the quarter were $2.44, a 41% jump from $1.73 in the third quarter of 2021.
For the nine months ended September 30, 2022, revenue was $480.6 million, up 63.2% from $294.4 million in the prior year period. Earnings per share for the nine-month period were $5.75, more than double the $2.80 earned in the prior year period.
Global Ship Lease pays a big 8.1% dividend yield. The annual dividend is $1.50 per share.
However, had you bought the stock a year ago when it was trading above $29, you’d be earning nearly three percentage points less.
But, as I pointed out, business is getting better, not worse, for Global Ship Lease…
During the course of 2022, the company added more than $920 million of contracted revenues. And Global is buying back shares – it repurchased more than $20 million worth last year.
Even using the most conservative forecast, Global Ship Lease is estimated to grow earnings by nearly 10% in 2023.
The expected $9 in earnings per share in 2023 means the stock trades at a ridiculously low 2.2 times projected earnings… and it also trades below book value.
I suggest you jump on board this stock.
And now on to my final recommendation…
HP (NYSE: HPQ)
HP is the company that was previously known as Hewlett-Packard before changing its name eight years ago.
But this more than 80-year-old company is still a major force in the computer and printing business.
In fiscal 2022, revenue was a colossal $63 billion, and the company earned more than $3.2 billion. Net cash provided by operating activities was $4.5 billion, and free cash flow was $3.9 billion.
Last year, the company returned $5.3 billion to shareholders in the form of share repurchases and dividends.
And it’s trading at a significant discount to where it was a year ago…
Currently, the stock is roughly 25% lower than where it was last March, despite expected 10% earnings growth in fiscal 2023.
The stock trades at slightly more than eight times earnings, a near 25% discount to its five-year average and a stunning 55% discount to its sector average. The company’s price-to-sales ratio is a miniscule 0.48.
And the company increased its 2023 dividend by 5% to $1.05 annually.
Today, the stock yields 3.6%. But if you’d bought the stock a year ago, you wouldn’t even be earning 3%.
With a footprint that spreads into nearly every sector of the computer and printing industries, HP is going to flourish as the global economy rebounds.
These are just a few examples of why a bear market can be a long-term investor’s best friend. You get the opportunity to pick up cheaper shares and higher yields on companies that are growing despite their recent stock prices.
Good investing,
Marc