Profit from aggressive dividend-paying stocks

Investors generally look to aggressive stocks for capital gains and to more conservative stocks, like utilities, for income. However, there are some aggressive stocks that pay dividends that are as high — or even higher — than more established companies.

(We’ve updated our buy/sell/hold advice on a high-dividend aggressive stock in a just-published issue of Stock Pickers Digest. See below for further details.)

Dividends are a plus in aggressive investing — but focus on quality

As with conservative dividend-paying stocks, aggressive picks that pay dividends offer investors a measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake — either the company has the cash to pay dividends or it doesn’t.

However, it’s important to avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). That’s because high yield can sometimes be a danger sign rather than a bargain. For example, a dividend paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield).

As well, you should always remember that while aggressive stocks hold the potential for greater gains than conservative selections, they expose you to a higher level of risk — whether or not they are dividend paying stocks.

That’s why we recommend that you look beyond dividend yield when making investment decisions, and look for companies that have established a business and have at least some history of building revenue and cash flow.

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Russel Metals: A high-dividend aggressive stock that’s an industry leader

In the current issue of Stock Pickers Digest, we’ve updated our buy/sell/hold advice on Russel Metals (symbol RUS on Toronto). Right now, Russel pays a quarterly dividend of $0.25 a share, for a 5.5% annual yield (following a cut from the previous level of $0.45 a share). That’s a high yield, especially for a stock in the volatile Manufacturing & Industry sector.

However, Russel is a leader in its field: The company is one of North America’s largest metal distributors. It serves its roughly 18,000 customers through a network of 58 Canadian and 12 U.S. locations.

The dividend paying stock’s earnings rose sharply in the latest quarter, even though its revenue declined. Lower steel prices were the main reason for the lower revenue. However, Russel had already taken measures to control its costs and conserve cash: In early 2009, it cut 500 jobs (or 16.7% of its workforce), lowered executive pay by 10% and reduced its remaining employees’ hours. Those measures are letting it post higher earnings.

Resource exposure adds risk — and strong potential for gains

Russel gets about 32% of its sales from clients in the oil and gas drilling industry. That, plus its exposure to fluctuating steel prices, adds risk. However, the company’s long-term outlook remains positive, and it’s well positioned to gain as the economy rebounds further. That could prompt Russell to increase its dividend.

For full details on Russel Metals and 17 other stocks that may be suitable for the part of your portfolio you devote to aggressive investing, be sure to consult the latest Stock Pickers Digest. What’s more you can get this issue absolutely free. Click here to learn how.