Happy Monday, I hope everyone had a great weekend! Today we’re going to talk about how to have your cake and eat it too.
You might have heard the phrases “income stock” and “growth stock” tossed around a few times. Generally, an income stock is an older, established company, which pays high dividends, but won’t grow significantly. And a growth stock is a younger, higher tech company, which is too cash strapped re-investing in the business to pay a dividend. For the most part, you have to pick income or growth (hence the cake and the eating).
But the recent crash in oil prices created a magical opportunity where I could sort-of pick both. So I did.
Last summer someone had mentioned that they invested in HollyFrontier Corporation (HFC), an independent petroleum and oil refiner, because it pays great dividends. Although I love a good dividend stock, the stock price seemed too high and stagnant. But while I didn’t buy, I added the stock to my watch list just in case.
And then, everything changed. The stock price, along with just about everything else related to oil, crashed to nearly half the original value. Suddenly I had a bargain to take advantage of. So last week, I invested in some shares of HFC.
As part of my resolution to explain all of my personal investments on the site, here are the reasons I decided to invest in HFC:
Low Price due to Non-Business Factors. As I’ve mentioned before, I like buying companies when the stock price goes down without a logical or business-driven reason why. Here, the stock price was battered by oil prices, not the company’s operations. The company currently has an average analyst target price of $49.83, representing big potential upside value.
High Dividends. The stock pays a standard dividend of $0.32 per quarter, plus a special dividend, of $0.50 per quarter. Including both comes out to a nearly 10% dividend yield when I bought it. Plus, HFC has a history of raising dividends.
Low Price to Earnings Ratio. At 13x price to earnings, HFC has a valuation that’s in line with other oil refiners, and low compared to most stocks.
Low Price to Book Ratio. This ratio, plus with the dividend yield, were the deciding factors in buying the stock. Right now, HFC has a price to book value of 1.3x. That’s the stock price divided by the book value per share (book value is the net assets, think property, cash). In other words, every share of stock is backed up nearly 100% by tangible assets.
I’m not sure this stock will ever trade much higher than what it was at this summer before it crashed, but that still would give me significant upside on my investment. And on top of those gains, I’ll get a high dividend yield. If the dividend yield drops significantly though after the price stabilizes, I would consider dropping the stock.
I think the oil price crash provided quite a few opportunities to get a bargain price on an oil refiner stock that pays high dividends. If you’re looking for a dividend investment you may want to investigate HFC or a similar refiner further.