Four Cheap Income Stocks To Buy

Last week, I provided updates on three recommended stocks. Today, let’s follow suit with three of the income-oriented stocks I’ve recommended in recent months. 

Emerson Electric (NYSE: EMR), which I recommended in this article, is a diversified electrical-equipment conglomerate that sells products and services in industrial process management, automation, climate control, network support, power technology, motors and construction and maintenance tools. The company markets its products in more than 150 countries. It’s been hurt by the oil and gas sector’s weakness; declining demand from China, Brazil and other emerging markets; and the strong dollar, which boosts relative prices of Emerson’s products for international buyers.

#-ad_banner-#Emerson is unlikely to stage a strong earnings rebound until the oil and gas sector recovers. But analysts think that could happen this year, and in the meantime Emerson will muddle through just fine thanks to its strong market shares in myriad businesses. I also expect surprisingly good results from its electrical equipment used in the renewable energy industry.

And as I wrote in December, with Emerson you get paid while you wait. Emerson shares yield 4.2%, supported by strong cash flows. The company has increased its dividend for 59 years in a row, a streak I expect to continue — especially if the share price doesn’t move much higher for a while. Emerson’s management also has a history of using cash to buy back shares, boosting per-share measures. My advice remains unchanged: “Buy this one, stash it away until the inevitable rebound and enjoy the hefty dividend yield in the meantime.”

Wells Fargo (NYSE: WFC), recommended in that same article, is one of the strongest U.S. banks; it ranks #3 in total deposits and #1 in market cap, and its assets are in the right places: retail banking, consumer lending, brokerage and retirement, with about half of income coming from fees and half from interest.

My one caveat in December was that Wells Fargo’s loans to the energy industry could bear watching. Despite not being large enough to cause serious damage to its well-capitalized balance sheet, energy loans could impact earnings and cause investors to flee the stock. That’s part of the reason for its poor performance of late. And on February 9, the bank’s CFO told an investor conference that energy exposure totals about $42 billion, higher than the previously reported number (partly for technical reasons). That spooked more analysts and investors, and it does raise an eyebrow given the historic weakness in oil and gas prices and the probable bankruptcy of some energy companies.

For this reason, I would consider Wells Fargo more risky than its otherwise sterling, and well-deserved, reputation as a high-quality bank would warrant. Conservative investors should sell the stock and reinvest the proceeds in a high-yielding stock less vulnerable to the energy sector, such as one of the utilities mentioned below. If you can handle a little volatility, Wells Fargo seems a good bet for recovery from this point — but the road to a nice total return could be a little rocky.

Southern Company (NYSE: SO), which I recommended in September, has regulated electric utility operations are centered in Georgia, Alabama, Mississippi and Florida. It also has a variety of telecom operations and operates three nuclear power plants. And once it closes on its acquisition AGL Resources (NYSE: GAS), an Atlanta-based natural gas utility with 4.5 million customers along the East Coast, Southern will be the largest utility company in the country.

In early February, Southern announced slightly disappointing fourth-quarter earnings and lowered its guidance for first-quarter earnings slightly. Investors correctly took this mild setback in stride; for the most part, Southern stock has held up well in recent weeks — a testament to its high quality and solid yield. The stock now yields 4.5% and the company has raised the dividend annually since 2003. This is one of the best defensive, high-yield stocks in the market.

The same goes for Dominion Resources (NYSE: D), the major electric utility in Virginia and North Carolina and an operator of natural gas utility, distribution and storage operations in those states plus West Virginia and Ohio. I recommended the stock in this article, and I continue to advise buying it for income-oriented investors.

The big news for Dominion of late was its announced $4.4 billion proposed acquisition of Questar (NYSE: STR), a Utah-based natural gas distributor covering Utah, Wyoming and Idaho. Analysts said the deal represented good value for Dominion, which expands its footprint in the West while putting its ample cash resources to work. The company retains its ability to increase dividends, which it has done annually since 2004; the stock currently yields 4.1%.

Risks To Consider: Emerson Electric is vulnerable to lower-than-expected economic growth in China, Brazil and emerging economies. Southern and Dominion could be hurt if interest rates rise faster than expected, but that seems unlikely in the foreseeable future given concerns about the economy.
Action To Take: Buy Emerson Electric below $46.50, Southern Company below $49 and Dominion Resources below $71. Conservative investors should sell Wells Fargo; aggressive investors should hold.

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