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Two cheap, speculative, dividend paying energy stocks

Markets are taking a well-deserved breather today, just like the Australian cricket team’s bowlers.  Overnight our moustachioed fast bowlers toiled for 134 overs before finally bowling South Africa out, in the process securing a series win against the world’s best test cricket team, with just a mere 27 balls remaining in the match.  Not so long ago, Australian cricket was in total disarray, losing 4-0 in India and 3-0 in England. Just goes to show what good management can do to effectively the same group of players.

Investing is no different.

You need patience, as Scott Phillips of Motley Fool Share Advisor recently reminded me.  In September last year, he named that new breed’ ASX tech stock Bruce Jackson recently told you about as one of his Best Buys Now.  Yet for a few of weeks after that pick, the stock was effectively marooned. Fast forward to now, and after another big jump yesterday, the stock is up 75% in 6 short months.

You also need good management, something our ‘new breed’ tech stock has in spades, seeing as they are led by an industry veteran who has “done it all before.”  I know Bruce is very happy to be backing him, and the company, with what has now grown to be a sizable investment — it’s what happens when a stock you own jumps 167%!  Scott still rates the company as a buy for Motley Fool Share Advisor members, telling readers yesterday there was “more to come.”  That’s code for buy now, and/or look out above!

Aussie economy on the mend… and faster than you could ever have imagined.

Although the market is flat today, the past couple of days has seen the release of very encouraging economic data.  Yesterday saw a welcome fall in the household savings rate, meaning Aussie consumers are finally re-opening their collective wallets and purses as the GFC fades further and further from memory.

Source: The Age

Given we’re saving less money, we must therefore be spending more money, and when we Aussies go spending, we go shopping. Right on cue, today we found out retail sales for January jumped an impressive 1.2%, way above consensus estimates of just 0.4%.

Time to go stock shopping?

Is it time to buy some specially selected ASX retail stocks?  It could be, especially those of the dividend-paying variety.

Speaking of dividends… There is consistent proof that high dividend stocks outperform non dividend payers.  Here’s a number of reasons.

1.  High dividend yielding stocks can be a proxy for cheap stocks.

Similar to low price to earnings ratio stocks, high dividend yield stocks can indicate that prices are cheap compared to their peers. Of course, in some cases, a high dividend yield can mean the price is low for a reason and the current dividend is unsustainable.

2. Companies paying high dividends usually have fairly stable reliable earnings.

You only have to look at the big four banks and their consistent earnings over the past decade or so. They can afford to pay out high dividends thanks to consistent earnings growth. It may be low growth, but it allows the banks to raise their dividends almost every year.  That doesn’t mean you should buy the banks at any price though. I personally am not touching them with a barge pole — not at these lofty prices anyway.

Compare that consistency in earnings in dividends to traditional non dividend-paying stocks such as gold miners, oil producers and airlines. Earnings usually jump around and all three sectors are capital intensive so need to keep more of their earnings to reinvest, rather than pay out dividends.

3.  Even in market downturns, share prices may sink, but dividends can offset the pain.

study by Investment Management Consultants Association found that between 1871 and 2010, dividends provided more than half the US market’s nominal return and 70% of its real return.  That has been supported by research by Tweedy Browne, who found that dividend paying stocks deliver higher returns than the market.

Morningstar analysis also found similar results.  If you consider how many busts the stockmarket has faced in the years between 1871 and 2010, high dividend paying stocks are an important part of your portfolio — if you want to generate high returns.

Continuing the dividend theme, here are two higher risk dividend payers that are forecasting a good year.

As Scott and Andrew said in step 3 of their newly released 6 steps to building your Foolish portfolio, exclusive to Motley Fool Share Advisor members…

When you have built solid core and growth levels, and are on track for a comfortable retirement, you may want to consider speculative companies. These are your lottery tickets and should only be purchased with money you can afford to lose (0% to 10%).

WDS Limited (ASX: WDS) a mining services company, is an anomaly amongst ASX listed stocks, paying quarterly dividends as opposed to semi-annually. The company’s current forecast dividend yield is around 5.4%, and is trading on a prospective P/E ratio of between 11.4 and 13.3 based on the company’s full year forecasts.

While the mining downturn hit revenues and profits, WDS has a sizable energy division, which currently generates more than 80% of revenues. With net cash of $27.1m, an order book at near record levels, strong growth prospects for the oil and gas industry, and massive cash flows during the last half ($71 million), WDS could be one stock to add to your watchlist.

Titan Energy Services (ASX: TTN) is another company focused on the oil and gas services sector. In the last half, Titan reported a 117% jump in net profit, with earnings per share climbing 55%. Full year EBIT is forecast to be between 45% and 59% over the previous year.  Titan is trading on what appears to be a reasonably cheap P/E ratio of 10.7 times, and is currently paying a fully franked dividend yield of around 3.2%, which could rise as earnings grow.

Both WDS and Titan are flying under the radar — most fund managers are unable to invest in them because of their respective market caps of $157m and $107m.

But not you… if you fancy adding a bit of speculative, dividend-paying action to the top of your investing portfolio pyramid.

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Of the companies mentioned above, Mike King has no interest.

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