This is a crazy market. Last year, there was a large stock market drop and the market finished pretty close to even. And this year, the market has already gone down a lot. We are still going through the first week of the year, and it is down a lot. While we won’t violate our stock rules, let see what crazy pick we can add to our portfolio.
Most dividend investors are probably thinking about a high yield stock as speculation. That seems too easy to us. Let’s go in the other direction. Let’s pick a stock in a sector that is in a lot of pain. The stock market feels that way anyways. We are going to pick up a low yield stock with a lot of potential upside.
Best of Breed
We still want a best of breed stock. Going through our best of breed list, we have Alcoa (AA) in aluminum. Right now, aluminum is in pain, like most commodities. And aluminum is currently being over produced. Boooo. I know, let’s buy them anyways. Hmmmm, the stock market is down, the stock is in a hard sector, the immediate upside does not appear to exist, and it pays a small dividend. I know, let’s throw money at it and invest.
First, how did they become best of breed. This one was actually pretty easy. Can you name another large US aluminum manufacturer? No? Well, then by default, they have to be the best. Not a good enough reason to invest in the company, but it does satisfy one of our rules.
Second, do they pay a dividend? Yes, although it is a small amount. Currently, they pay about 1.4%. Not great, but it does meet another rule of paying a dividend. If we look at the history, they were paying $0.15 per share or more, or 5 times as much. That would bring them to a yield of 7%. That would be a great yield on our purchase price. And we are investing for the long term. But how do we get to that great yield?
Third, Alcoa (AA) is doing a lot of work to fix their business over the past few years. They have closed plants that are not making money, increasing margins. And they are selling more finished products such as the metal panels on the Ford (F) F-150 truck. And they are increasing their sales with many others, like Boeing (BA). Like most things, businesses go in cycles. When aluminum does go up, it will be a fun ride.
Forth, the downside looks limited. Over the last 5 years, the low was $7.70 per share. That is about 11% downside, although it could go down further or out of business. Going out of business seems unlikely, because if they have not already done so with cheap aluminum pricing, they probably will not. Even so, they are still profitable. That is a small amount of downside with the potential of so much upside.
So they appear to be a good dividend speculative pick. In addition, their P/S is only a 0.5. So for every $2 in sales, we are only paying $1 for the stock. And the dividend to revenue ratio is only 0.6% of sales. This is a very low amount, giving them a lot of room to grow their dividend in the future. So Alcoa (AA) could be viewed as a value stock instead of speculative. However, we are leaving them in our speculative section.
Crazy Market AA Purchase
So, we bought 33 shares for $292.12 including our commission. This will give us a dividend payment of $3.96. While this is currently small, we expect this to grow a lot in the future. And Alcoa (AA) is expected to split into 2 companies in 2016. This means we will have 2 companies that will be good investments. While Alcoa (AA) will remain our best of breed aluminum maker, we will see how the other half does. So we just bought 2 stocks for the price of one and expect both to do well. What crazy dividend stocks are you investing in? Feel free to post it below in the comment section below.
What do you think of this crazy market purchase?