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5 Cheap Stocks With 5% Yields Ideal for Cautious Investors

Few assets offer decent income these days, even after the recent dead-cat bounce in Treasury bond yields. Investors' best bet remains stocks with big dividend payouts, which offer the prospect of capital appreciation to go with high yields.

John Buckingham, manager of the Al Frank Fund (VALUX), which has outperformed the stock market by a wide margin over the last decade, has been making that bet, focusing much of his portfolio on stocks with substantial dividend yields. Buckingham highlighted five of his favorite stocks with yields in the vicinity of 5 percent.* The five are spread among a diverse range of industries and have reasonable valuations, making them excellent choices for safety conscious investors.

Verizon (VZ). The stock has gone nowhere this year, but with a yield of 5.7 percent, Buckingham says, the company is paying shareholders good money to wait for business to pick up and the stock to pick up with it. Besides, something good is happening to Verizon - the mobile network of its main rival, AT&T (T), is infuriating its customers.

"There's been a substantial shift to Verizon because everyone's fed up with AT&T," he told MoneyWatch. "AT&T is the worst and Verizon is the second worst."

Not a ringing endorsement, pardon the expression, but the high yield and reasonable valuation of 15 times analysts' consensus estimate of next year's earnings make it a safe holding, in Buckingham's view. "We don't see a lot of downside risk," he said. "It's a company we think has solid technology in a slow-growth business. We'll milk that yield while we wait for modest capital growth."

United Online (UNTD). The stock of this operator of online retail businesses and a service offering dialup Internet access, "has gone nowhere for a long time," said Buckingham, who probably wouldn't have much of a future in public relations if he chose to go that way. "They've had some issues. Their earnings stream has not been as strong as people had hoped."

But United Online is not exactly priced for perfection, either. It trades at about 7 times next year's earnings and yields nearly 6 percent. Buckingham, who says he's "optimistic but also realistic" about the company, thinks that investors may be underestimating the earning power of the dialup business. He notes that much of rural America has no alternative way to get online.

Hudson City Bancorp (HCBK). This life-in-the-slow-lane savings bank caters to a well-off clientele in the Northeast. Its stock has been languishing (one reason for its high yield of just under 5 percent) because the soft New York economy has left the bank with a high number of bad loans.

But Hudson City's employees "do a good job on underwriting and don't make funny-money loans," Buckingham said, and the ratio of the bank's stock price to its book value, a key valuation measure, is barely more than 1.

"There's still a lot of skepticism toward banks," he said, but "this is a company that made it through [the recession and financial crisis] with its reputation intact. It's financially sound and has plenty in reserves. I'm not saying happy days are here again, but the stock is discounting more bad news than is likely to occur."

Bristol-Myers Squibb (BMY). Drug makers have been out of favor as Wall Street mulls over the impact of Obamacare. This "boring old pharma company," as Buckingham calls it, has been especially overlooked because it has no blockbuster drug for investors to pin their hopes on. What it does have is a lot of money-spinning products in the sub-blockbuster category and a dividend yield of about 5 percent. Also, concerns about health care costs are not going away, and that could start working to the advantage of drug makers, including Bristol-Myers.

"Pharmaceutics are often a more cost-effective way of treating illness than cutting somebody open," he said. "We still like the business, but it's been much maligned."

Tsakos Energy Navigation (TNP). If a stock trading at book value - the intrinsic worth of its net assets - is a bargain, then how about one trading at less than half? Tsakos, a Greek oil tanker operator, sells for slightly more than 0.4 times book.

The reason that the stock, which yields just under 6 percent, is so cheap, Buckingham explained, is that "tanker rates have been volatile and not so great." He expects rates to improve as global growth picks up and as fewer tankers remain in service as companies replace their fleets with safer double-hulled tankers - something that Tsakos has already done.

"Single-hull tankers have been banned, and Tsakos has a very young fleet, which we think is an advantage," he said. "Earnings are not much to speak of right now, but expectations going forward are much greater. This is the time you want to be investing in these cyclical areas."

*MoneyWatch believes that index funds, with their low expenses and history of strong returns, should form the core of an investment portfolio. Still, some investments perform better than others and so do some money managers. With that in mind, here is one in a series of posts running on Tuesdays through December offering top investors' top picks for 2011.

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