Two Low-Priced Stocks For Yield Hogs

We don't typically think of the low-priced stock universe as a haven for income plays, but I've picked up a few nice ones in the past, including MCG Capital (MCGC) and RAIT Financial Trust (RAS).

Today, lets look at two more, one from a sector often associated with income and another surprising choice.

The latter is upper-Midwest supermarket operator Roundy's (RNDY), which comes our way via the Low-Priced Insider Buying screen and presently yields about 5.4%.

With margins in this business typically being razor thin, investors tend to assume staying afloat and battling Wal-Mart's persistent expansion into grocery would preclude executives from giving a moment of thought to dividends.

Actually, though, the business can be quite profitable—yes, margins are thin but turnover tends to be very high—and Wal-Mart, as powerful as it can be, isn't the end-all and be-all of everything. RNDY definitely feels a competitive pinch, but its efficient operations allow it to come closer to Wal-Mart prices than most other local rivals.

The company has two efforts that particularly stand out on the basis of convenience, store ambiance and product selection emphasizing RNDY's perishables and company-brand products, both of which are outperforming company averages.

One is the emerging Mariano's chain in Chicago and the other is the upgraded Pick 'n Save chain in Milwaukee both of which seem poised for breakout years in 2o14. Meanwhile, over the trailing 12 months, the dividend amounted to only 55% of that portion of cash from operations left over after capital spending.

There may also be a special situation angle here. On a recent conference call, an analyst characterized RNDY was a tale of two companies (Mariano's and the new Pic 'n Save, and the rest of RNDY) and started lobbying management in the direction of some sort of corporate split. These were analysts talking, not executives, but such a ball, once it gets started, tends to keep on rolling.

Frontier Communications (FTR), which comes to us via the Low-Priced Value screen, is a company you'd expect to pay a good dividend. It's the fourth largest ILEC, incumbent local exchange carrier, better known as a traditional landline phone company.

Like the others, it's struggling to compete against the modern alternatives: wireless, cable-company phone service, and Internet telephony. Given investor concern with this sort of business, the yield has been pushed up to a level that reflects high risk: 9.1%. But FTR's dividend, after having been reduced at the start of 2012, is now very well covered by cash flows.

Over the past 12 months, the payout amounted to 53% of that portion of cash from operations remaining after capital spending. Meanwhile, Frontier, which serves rural and small- and medium-sized cities, is taking a particularly local and proactive approach to marketing, including such approaches as door-to-door, having technicians sell while on service calls, local events, etc.

Low-cost, high-speed, broadband offerings have been selling well and FTR is experiencing better customer retention trends.

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Excerpted from October issue of Forbes Low Priced Stock Report.

Marc Gerstein is editor of Forbes Low Priced Stock Report, research director at Portfolio123 and author of Screening the Market (Wiley, 2002).