Prudent picks: Four favorites for yield

by John Buckingham, editor The Prudent Speculator

It is nice to see the renewed interest in income, as we can’t forget that dividends and their reinvestment have long been a substantial contributor to the total return on equities.

Here, we highlight four dividend-paying stocks that we believe are undervalued relative to their long-term appreciation potential: Hudson City Bancorp (HCBK), Merck & Co. (MRK), Ship Finance International (SFL) and Whirlpool (WHR).

Hudson City is the sixth-largest thrift in the U.S. Its subsidiary, Hudson City Savings Bank, offers jumbo mortgages to affluent customers while maintaining operations in nine of the country’s wealthiest markets.

Hudson has relatively conservative underwriting standards, a history of profitability and industry-leading efficiency ratios. Many of its clients have strong credit scores and make large down payments.

The combination of high income, good credit and substantial homeowner equity helps ensure that borrowers are less likely to default, and that losses are limited when defaults occur. Shares currently offer a 5.7% dividend yield.

Merck makes pharmaceutical products to treat conditions in a number of therapeutic areas, including cardiovascular disease, asthma and osteoporosis.

The company also has a substantial vaccine business and is further diversified with animal health and consumer products divisions.

We like that Merck generates strong free cash flow, is proactively seeking opportunities to cut costs and has a drug pipeline with solid potential. Shares are attractively valued and carry a dividend yield of 4.6%.

Spun off from tanker operator Frontline in 2003, Ship Finance owns an international fleet of crude oil tankers, dry bulk carriers and drilling rigs.

Instead of taking on the challenge of operating the assets in its fleet, the company secures medium and long-term charters with customers that include base-rate and profit-sharing components.

SFL has a fixed-rate charter backlog totaling close to $7 billion and no major needs for refinancing.

The charters provide a secure source of cash flow which in turn provides support for a whopping 12% dividend payout.

Whirlpool (WHR) is the world’s leading producer of major home appliances.

While its North American operations continue to struggle, Whirlpool’s growing international presence is the key driver behind our positive take.

International sales have grown from 38% of the business in 2005 to 50% today. Much of this growth is being captured in emerging markets such as China, Brazil and India.

The firm generates strong free cash flows and has an ability to repeatedly introduce innovative, premium-priced products. Inexpensively priced, WHR sports a yield of 4.0%.

Learn more about this financial newsletter at John Buckingham's The Prudent Speculator.