Investing

4 Contrarian Stocks to Buy Yielding 5% or More With Big Upside Potential

Lee Jackson

Published: October 12, 2016 8:35 am

Last Updated: January 13, 2020 2:30 am

Rates are still near the lowest levels in history, but by the way dividend stocks are being sold, you would think the late 1970s and early 1980s were right around the corner. The fact of the matter is, based on what most Wall Street strategists are saying, the Federal Reserve will raise rate once this year, in December, and twice each in 2017 and 2018. If every rate hike is 25 basis points, or one-quarter of 1%, the federal funds rate will still be under 2% in 2019.

That news hasn’t stopped investors from selling dividend-yielding stocks like they were going broke. In fact some of the top companies are down 10% to 20% over the past two months, many of which have very bright prospects. We screened our 24/7 Wall St. research data base for stocks that were rated Buy and had a yield of 5% or more, and we found four outstanding companies.

GameStop

This top retailer also looks to benefit from new releases. GameStop Corp. (NYSE: GME) operates as an omnichannel video game retailer. It sells new and pre-owned video game hardware; physical and digital video game software; pre-owned and value video game products; video game accessories, such as controllers, gaming headsets, memory cards and other add-ons for use with video game hardware and software; and digital products, including downloadable content, network points cards, prepaid digital and subscription cards and digitally downloadable software.

The company also sells mobile and consumer electronics, including smartphones, tablets, headphones and accessories, as well as pre-owned smartphones; personal computer (PC) entertainment software in various genres, including sports, action, strategy, adventure/role playing and simulation; and strategy guides, magazines and gaming-related toys. As of January 30, 2016, it operated approximately 7,117 stores in the United States, Australia, Canada and Europe. GameStop primarily offers its products under the GameStop, EB Games and Micromania names.

Leading Wall Street analysts feel that hardware updates and the holiday release slate this year should help the gaming segment. In addition, the second-half hardware refreshes and fourth-quarter high-quality product releases could help drive traffic to the stores.

GameStop investors are paid a large 5.68% dividend. Merrill Lynch rates the stock a Buy and its price target is $37. The Wall Street consensus price objective is $34.82. The stock closed Tuesday at $26.05 a share.

GlaxoSmithKline

This top global pharmaceutical could offer outstanding total return for investors as solid portfolio holding. GlaxoSmithKline PLC (NYSE: GSK) offers pharmaceutical products in the therapeutic areas, including respiratory, anti-virals, central nervous system, cardiovascular and urogenital, metabolic, anti-bacterials, and emesis, dermatology, rare diseases, immuno-inflammation, vaccines, and HIV. It also provides consumer healthcare products in wellness, oral health, nutrition, and skin health areas.

Last year the company announced that the dividend would stay at its current level through 2017, a solid pledge for those seeking security. Also, the FDA approved the company’s Nucala add-on product for severe asthma with a very broad label. In addition, its ViiV Healthcare unit also reported promising data for its HIV treatments. GlaxoSmithKline plans to submit up to 20 new regulatory filings within the next five years, which confirms a very strong pipeline.

GlaxoSmithKline investors are paid an outstanding 5.11% dividend. The Merrill Lynch price target for the Buy-rated stock is $50. The consensus price objective is set at $48.67. The shares closed Friday at $42.14.

Seagate Technology

Though still down over 40% from the highs posted last year, the stock has rallied huge off the lows printed in May. Seagate Technology PLC (NASDAQ: STX) designs, manufactures and sells electronic data storage products in the Asia Pacific, the Americas and EMEA countries.

The company provides hard disk drives, solid state hybrid drives, solid state drives, PCIe cards and serial advanced technology architecture controllers that are designed for enterprise servers and storage systems in mission critical and nearline applications, as well as for client compute applications comprising desktop and mobile computing.

One of Wall Street’s biggest activist investors, ValueAct Capital, recently became one of Seagate’s largest shareholders with a new 9.5 million share stake. ValueAct established its new position via a secondary block trade, and will gain a seat at board meetings as an observer. ValueAct Capital generally invests in out-of-favor companies and works with them to make changes and boost long-term shareholder value.

Seagate investors receive a huge 7.18% dividend, which many thought would be cut, but it has been held steady. Jefferies has a rating of Buy and a $38 price objective on the stock. The consensus target price $34.10, which is below where the stock closed most recently at $35.10.

Vodafone

This European telecom company tends to fly under investors’ radar and it makes very good sense now. Vodafone Group PLC (NASDAQ: VOD) has been scorched since the middle of May, in part because of the Brexit, and offers a solid entry point here. The company offers voice, messaging and data services across mobile and fixed networks; broadband and TV services; cloud and hosting, as well as internet protocol-virtual private network services; roaming services; and unified communications services.

It also provides M-Pesa, a mobile money transfer and payment service, and Vodafone One, an ultra-high-speed fixed broadband service with Ono Fibre, home landline, 4G mobile telephony and Vodafone TV.

In addition, Vodafone offers Internet of Things products, which includes communication between devices via mobile technologies; international voice transit and roaming; carrier services, such as fixed and mobile connectivity and other services; and smartphones and tablets. The company serves 462 million mobile, 13 million fixed broadband and 9.5 million TV customers. It sells its products primarily through branded stores, distribution partners and third party retailers.

Vodafone shareholders receive a 5.48% dividend. The $36.31 Merrill Lynch price target compares with the consensus estimate of $38.15, The shares closed most recently at $27.85.

All these companies trade well off of highs printed last year, and all have solid upside potential. These are more suited for aggressive growth accounts that can tolerate volatility.