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This Takeover Candidate Offers High Yield and High Growth

Investors looking for high yield and high growth stocks should consider NTELOS Holdings Corp (NTLS) as a possible portfolio addition.  For income, the stock boasts a healthy 8.95% dividend yield.   For growth, earnings per share are projected to grow 29%next year compared to the current year.  This is a combination that can create significant upside for the stock price.  In addition, there is considerable speculation that NTELOS may be acquired by a larger telecom provider.

First Call consensus has NTELOS earning $1.32 per share in 2014 which is an increase of 29% from its 2013 EPS.  The EPS growth will better support the current dividend payout ratio.  Investors can wait for a pullback to add new shares since NTLS shares are up 30% in the past three months due to talk of a takeover.

AT&T Inc.’s (T) deal to grab Leap Wireless for$1.2 billion in cash continues the U.S. wireless consolidation race and has Wall Street looking at other possible targets.  NTELOS is a name being mentioned as having attractive spectrum. The company is small, with just 451,000 total subscribers at the end of March and a market value of$360 million. By comparison, Verizon Wireless has more than 90 million contract customers.

Despite its size, NTELOS has connections to bigger players including a wholesale deal to provide Sprint (S) service in West Virginia and western Virginia.  It is also working with Dish Network Corp. (DISH) to co-develop a fixed-mobile broadband-service within its coverage territory.

Once completed, the service is expected to give NTELOS and Dish customers access to high-speed Internet, a service that is especially lacking in some of the rural areas NTELOS covers.  The agreement comes as Dish has been working to plug a significant hole in the services it provides, it can’t offer high-speed Internet competitive with cable providers.

NTELOS Holdings Corp., a leading regional provider of nationwide wireless voice and data communications and home to the “best value in wireless,” recently announced it will be added to the Russell Microcap® Index, effective at the close of the market on June 28, 2013.

NTELOS Holdings Corp., operating through its subsidiaries as “nTelos Wireless,” is headquartered in Waynesboro, VA, and provides high-speed, dependable nationwide voice and data coverage for approximately 451,000 retail subscribers based in Virginia, West Virginia and portions of Maryland, North Carolina, Pennsylvania, Ohio and Kentucky. The Company’s licensed territories have a total population of approximately 7.9 million residents, of which its wireless network covers approximately 6.0 million residents. The Company is also the exclusive wholesale provider of wireless digital PCS services to Sprint Nextel in the Company’s western Virginia and West Virginia service area for all Sprint CDMA wireless customers.

Low Beta Dividend Stocks for an Uncertain Market

As the markets continue to show uncertainty and a lack of capitulation, investors are looking for a place to hunker down.  The best place at this time is in low beta stocks with dividend yields (defensive stocks) to support the share price.  I had identified 5 stocks that are up in price the last 4 weeks and have a bullish outlook for when the market rallies.  Here are 5 stocks to consider:

Tobacco operator Altria Group (MO) seems to do well in these types of markets.  It is up 4.9% over the last 4 weeks.  It has a low beta of 0.25 with a dividend yield of 4.91%.  MO has an equity summary score of 7.4 out of 10 for a Bullish outlook.

Low cost retailer Wal-Mart (WMT) shines when there is a slow economy.  WMT is up 14% in the last 4 weeks.  It has a beta of 0.33 and a dividend yield of 2.35%.  WMT has an equity summary score of 8.4 out of 10 for a Bullish outlook.

Telecom giant AT&T (T) is a steady as they go in this type of market.  AT&T is up 5.4% in the last 4 weeks.  It has a beta of 0.57 and a dividend yield of 5.03%.  AT&T has an equity summary score of 9.8 out of 10 for a VERY Bullish outlook.

Retailer Target Corp (TGT) has been performing great this year.  TGT is up 5.13% in the last 4 weeks.  It has a beta of 0.58 with a dividend yield of 2.06%. TGT just announced a 20% increase in its dividend.  TGT has an equity summary score of 9.2 out of 10 for a VERY Bullish outlook.

Pharmaceutical giant Bristol-Myers Squibb (BMY) is a solid dividend stock.  BMY is up 3.73% in the past month.  It has a beta of 0.41 with a dividend yield of 3.97%.  BMY has an equity summary score of 9.1 out of 10 for a VERY Bullish outlook.

Building a High Dividend Yield, Low Beta Income Portfolio (Part 1)

For income investors wanting to go it alone, they should consider creating a portfolio of high dividend stocks with low beta.  This type of portfolio will provide a risk to reward profile during times of uncertainty in the markets.  By adding the component of a bullish outlook to the low beta stocks indicates these stocks can be held in a long-term portfolio.  The high dividend yield can be compounded over time and will increase as these stocks raise their dividends each year.  This portfolio will be built in a series of articles.  Here are the first stocks to look at for your portfolio.

AT&T Inc. (T) provides telecommunications services to consumers, businesses, and other providers worldwide.   We see gains in consumer wireless and broadband continuing to offset some wireline voice pressure.  We believe T’s strong balance sheet, expected wide operating margins in 2012 and its review of rural assets are positives. While we think that failure to complete its planned acquisition of T-Mobile USA assets represents a setback, we believe T will move forward and has sufficient spectrum and liquidity to grow. We view T’s above-average dividend as secure and adding to total return potential, though with a rise in the shares in 2012.  T has a dividend yield of 5.69% and a 3-year beta of 0.58.  T has an equity summary score of 9.2 out of 10 for a VERY Bullish outlook.  The First Call Consensus of 37 analysts is a Buy rating.

Altria Group, Inc. (MO) engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally.  Although we continue to expect domestic cigarette industry volumes to contract over the long term, we see cigarette companies still having the ability to raise prices,
and thus margins.  As the largest U.S. cigarette manufacturer, MO should lead this pricing strategy, in our view.  Moreover, we look for more limited commodity input cost pressures than in other industries in the consumer staples sector.  Operationally, we think Altria is likely to benefit from several factors over the next several years, including the growth from higher-margin smokeless tobacco products and various restructuring actions.  MO has a dividend yield of 5.23% and a 3-year beta of 0.44.  MO has an equity summary score of 7.6 out of 10 for a Bullish outlook.  The First Call Consensus of 14 analysts is a
Buy rating.

Verizon Communications Inc. (VZ) provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide.  VZ is a large, steady high yield dividend stock.  It boasts a dividend yield of 5.3% and a 3-year beta of 0.54.  VZ has a
strong operating margin and perception of network quality, the company’s wireless segment should be a driver for VZ in 2012, even as we see higher
subsidies for smartphones launched on 3G and 4G networks.  We are encouraged by the relative stability in VZ’s wireline segment over the past six months, helped by FiOS gains and by the company’s above-average dividend. We believe VZ’s pending acquisition of spectrum from a cable consortium will help alleviate future network congestion. VZ has an equity summary score of 8.9 out of 10 for a Bullish outlook.  The First Call Consensus of 39 analysts is a
Buy rating.

High Yield Stocks with Growing Dividends that are Overpriced

My model for performing the intrinsic and future values are shown in the table below using three stocks that are trading at a premium or discount
to their fair value.  By using the average PE ratio and projected EPS growth, you can use the future time value formula to get an estimate of earnings X number of years into the future. Once you have the future projected earnings per share, just multiply by the PE ratio to get a future stock price. All of the projected growth rates are available on most websites providing detailed stock information. This is great information when looking at the future of a stock in comparative terms. Take this one step further, and you can determine the intrinsic value of a stock. Here, you are using the present time value formula based on your required rate of return. The end result is having a fair value estimate of the stock to compare to the stock’s current trading price. This comparison will determine if a stock is overvalued or trading at a discount.

We use the same concept to determine the future dividend payout and yield in future years.  For me, I prefer to project 10 years forward based on past compound annual growth rates [CAPG] of 10 years of data. The number of years can be adjusted for shorter time periods for stocks with less than 10 years of public data. What should your required rate of return be?  I am currently using a 10% return on invested capital.  Here is my assessment of three high yield
stocks.

Altria Group (MO) engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally.  Currently, MO is trading at a 17% premium to its fair value.  It has an EPS growth rate of 8%, with an average PE of 13.4. MO is projected to have a future dividend yield
of 5.5%, but its dividend yield on cost is projected to be 12% in 10 years.  This is an excellent investment to buy as a dividend grower especially on a pullback to its fair value of $25.

AT&T Inc., (T) provides telecommunication services to consumers, businesses, and other service providers worldwide.  Currently, T is trading at a 39% premium to its fair value.  It has an EPS growth rate of 3.7%, with an average PE of 14. T is projected to have a future dividend yield of 5.7%, but its dividend yield on cost is projected to be 8.9% in 10 years.  AT&T is overpriced for such a low growing stock but is a stable dividend payer.

Holly Energy Partners, L.P. (HEP) operates a system of petroleum product and crude oil pipelines, storage tanks, distribution terminals, and loading rack facilities.  HEP is trading at a 20% premium to its fair value.  It has an EPS growth rate of 6.7%, with an average PE of 21. HEP is projected to have a future dividend yield of 4.7%, but its dividend yield on cost is projected to be 9.7% in 10 years.  Investors should be cautious as HEP has a payout over 100% of EPS.

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Dividend Stocks with Bond-like Yields

While some wonder if dividend investing is a fad, the strategy probably has staying power. Bonds yield little, and short-term rates are near zero, leaving individuals with few places to find yield. Demographics favor income investing; millions of baby boomers retire each year, and they want income to supplement Social Security and minimize the drawdown of retirement assets.

Opportunities are limited in the bond market, with Treasuries topping out at 3% and high-quality 30-year municipals at only 3.5% after a sharp rally in recent months. These yields are near the lows of the past 50 years.  Companies with high and sustainable dividends are often valued more like bonds than stocks, partly because 4% and 5% dividend yields often are higher than the rates on many corporate bonds.

A 4% dividend seems to resonate with investors who are willing to pay premium prices for companies with high yields. Some of the strongest S&P 500 industry groups last year — utilities, consumer staples and drugs — had some of the index’s highest yields.  During 2011, high-dividend payers were the top-performing group in the S&P 500, with the top 50 yielders at the start of 2011 — all with 4%-plus yields — returning more than 8% (not including dividends), compared with a flat showing for the entire index, according to Birinyi Associates.

The companies on the list below, including Merck (MRK), Pfizer (PFE), Waste Management (WM) and American Electric Power (AEP), have sustainable dividends and reasonable price/earnings ratios.

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Covered Call Trade on AT&T (Video)

Brian Stutland lays out a covered call trade for income on AT&T (T)

Covered Call Trade on AT&T

 

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