Three stocks with affordable 4% dividends

A recent article at SmartMoney focuses on 3 Stocks With Affordable 4% Yields. By “affordable” the article is referring to the companies’ abilities to pay their dividends while still having enough cash to pay for other expenses and investments – a sign that the dividends are likely to be safe.

The stocks – which include an electric utility, a parts distributor and a provider of mail processing solutions – each have a current dividend yield of at least 4%. Below, I take a closer look at each of the three stocks mentioned (the stars represent DividendInvestor.com’s star ranking system – three stars are five years of consecutive dividend increases, four stars are ten, and five stars are 20):

Ameren [[AEE]] (0 stars) – Ameren, an electric utility operating in the states of Missouri and Illinois, saw its stock take a drubbing last year after it cut its dividend by almost 40% to conserve cash and reduce its borrowing needs:

Currently trading at about $26 and yielding 6%, the shares of AEE are still barely in an intermediate-term uptrend after bottoming just below $20 in March of 2009. A break much below the $25 level would change this picture to something more neutral.

Fundamentally, AEE is probably about roughly fairly valued here, perhaps slightly on the undervalued side. Its 6% dividend yield is slightly above the average yield of around 5% for utility stocks, which may give the stock added support in a further market decline. While the company certainly doesn’t have a distinguished record for dividend growth, its current dividend does appear safe and sustainable (i.e., “affordable”).

I have a long position in AEE (initiated some time ago at higher levels), as well as an options position in AEE that could result in me buying additional shares at lower levels ($22.5).

Genuine Parts [[GPC]] (*****) – The stock of this North American distributor of automotive and industrial parts has been the best performer of the three stocks mentioned here:

Trading at about $39 and yielding over 4%, the shares of GPC clearly remain in an intermediate-term uptrend from their March 2009 lows. A break below the $35-$36 level would suggest a more neutral to negative outlook.

Fundamentally GPC appears somewhat on the high end of its fair valuation scale, with current valuation estimates ranging from about $20 up to $44. Given its long and distinguished record of dividend increases (53 years according to DividendInvestor.com, garnering the company status as both a Dividend Achiever and Dividend Champion), it’s not surprising that the stock might fetch a premium. I’m currently short some put options in GPC down at the $30 strike level, which is where I’d feel more comfortable buying the stock.

Pitney Bowes [[PBI]] (****) – The stock of this U.S. provider of mail processing equipment and mail solutions has been under performing the market in recent years, perhaps reflecting the company’s position in a declining industry:

Trading at about $21 and yielding 6.7%, the shares of PBI appear to present a relatively neutral intermediate-term picture within a longer-term decline. Currently they’re oversold and approaching the $20 support level.

Depending on the valuation estimate used, PBI is either undervalued or somewhat overvalued. What is clear is that the company’s earnings growth prospects are cloudy at best, which makes valuing the shares problematic.

PBI has achieved the status of a Dividend Aristocrat – S&P 500 companies that have consistently increased dividends every year for at least 25 consecutive years – although its dividend increases in recent years have been only incremental and at a declining rate. While the company can apparently afford its dividend for now, questions about its future are enough to have me looking elsewhere.

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