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It's no secret that investors love dividends. The quarterly checks provide some instant gratification in the long-term investing game, and reinvesting them can be one of the best ways to make the most out of your money.

But dividend stocks often demand a sacrifice from investors. Companies that make those quarterly payments are generally slow-growers whose days of multibagger investment returns are over. If they believe the best use of their money is simply to return it to investors, they're probably content to grow just a little faster than the economy as a whole. These tend to be businesses with huge brands like Coca-Cola or Procter & Gamble, or industries like energy, telecom, or pharma that generate the cash flow for dividends without a need for massive investment in acquisitions or research and development.

Occasionally, though, an investor can find a high-yielding stock with upside potential in its share price, which usually happens when a dividend payer has been beaten down by the market. This creates not only an opportunity for the share price to soar, but also an ideal investing opportunity, because the dividend yield is unnaturally high. Let's take a look at three such stocks that present these opportunities.

The supermarket parent of Albertson's, Shoppers Food Warehouse, and several other chains, SUPERVALU is one of the biggest value plays in the market. Even after jumping nearly 30% from a pre-earnings-call low last week, the retailer offers plenty of upside potential. Although price-to-sales ratios in the grocery business are generally low, SUPERVALU's 0.04 P/S ratio is about as low as it can go. At that ratio, even a boost in net margin to just 1% would produce a P/E of 4, making shares look cheap.

The company's shares have taken a hit over the last year, due in part to a restructuring plan that meant sizable losses in the last two quarters. With that redirection now in the rearview mirror, SUPERVALU looks like a steal. Analysts estimate earnings of $1.27 for this fiscal year, which gives the company a forward P/E of less than 5. Add a 5.5% dividend yield into the mix, and the reasons to invest look compelling. While the income statement has taken a hit due to the restructuring, SUPERVALU's cash flow remains strong enough to support the dividend payouts.

Niska Gas Storage (NYSE: NKA  )
Natural gas has been one of the bigger economic stories over the past year, and dirt-cheap prices due to the supply boom have helped propel stocks like Westport Innovations and Cheniere Energy that stand to benefit from the gas glut. Niska has been on the other side of that bet, however, and its shares have taken a beating over the last year. As United States Natural Gas (NYSE: UNG  ) -- an ETF tracking natural-gas prices -- has fallen, so has Niska. Gas prices are down more than 60% in the last year, while shares in the storage company have dropped more than 50%.

But Niska is the largest independent natural-gas storer in North America, and it makes money off the volatility in the commodity price -- and by storing gas in the summer, when it's cheaper, and selling in the winter, when prices generally go up. This year's warm winter was among a host of problems that have knocked its share price down, and low prices and stability in gas prices have also hurt its business model. While natural-gas prices have continued to decline, Niska shares appear to have bottomed out, having traded near $9 for the past four months. A change in the direction of natural-gas prices would help the company, as would some volatility in the market. Conditions seem to be at their worst right now, and its business will be in demand due to large supplies. A 15% dividend yield is reason enough to invest, and there are plenty of ways for its shares to turn around and head north. At the very least, the record-breaking warm winter is unlikely to repeat itself.

Telefonica (NYSE: TEF  )
Finally, Telefonica presents an appealing opportunity for dividends and stock appreciation. The Spanish company has tumbled in the last year as concerns over that country's economy have grown and Spanish bond rates have risen to 6%. The telecom giant, though, may not be as exposed to the struggling Spanish economy as it appears, since it generates much of its revenue from Latin America. In fact, about 70% of its 2011 operating income came from Latin America and the rest of Europe.

As a telecommunications company, Telefonica provides a needed service with inelastic demand -- unlike, say, Banco Santander (NYSE: STD  ) , another beaten-down, cheap-looking Spanish company that offers a high yield. As a financial institution, Santander figures to have more exposure to the sour Spanish economy and any potential austerity measures imposed. Telefonica's shares, meanwhile have dropped nearly 50% in the last year, and it recently reached a new 52-week low just under $15. As the stock has dropped, its dividend yield has soared, now up to 11.4%. Shares look affordably priced at a forward P/E of just 7, and the company brought in over 8 billion euros in free cash flow last year.

Some more for the road
Beaten-down stocks can be a risky investment, but the reward can more than make up for it. Doing the proper due diligence and research becomes even more important, though, so if you'd rather stick with a safer dividend investment, I recommend taking a look at one of our newest special free reports: "Secure Your Future With 9 Rock-Solid Dividend Stocks." It details a group of dividend stocks, including familiar blue chips and some you may not have heard of, that you can count on to pay you back for decades to come. Click right here to get it.

Fool contributor Jeremy Bowman holds no positions in the companies in this article. The Motley Fool owns shares of Coca-Cola and SUPERVALU. Motley Fool newsletter services have recommended buying shares of Coca-Cola and Procter & Gamble, as well as buying calls on SUPERVALU. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (23) | Recommend This Article (110)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2012, at 12:10 PM, BxBruce007 wrote:

    I hardly ever see a discussion of the impact of foreign taxes when discussing foreign stocks. Can you tell us what the Spanish tax rate is for owning TEF and how that adjusts the yield? I've seen my returns reduced by 15-20% on some foreign stocks. If held in a retirement account, those taxes withheld cannot be recovered.

  • Report this Comment On April 18, 2012, at 12:49 PM, jdmeck wrote:

    If the company is not paying a dividend, why own it? The little investor will never own enough stock to have a say in the company or benefit directly from any profits. If your only hope is that someone wants to pay more for your share than you paid, you should just go take your money to Vegas. It's a good thing no one really stops to think about what they are buying or the whole thing would just collapse.

  • Report this Comment On April 18, 2012, at 4:12 PM, SkippyJohnJones wrote:

    @jdmeck - you could argue the same of almost any significant purchase or investment. The whole model is built on a certain amount of trust, and when the trust erodes values collapse. (property, precious metals, etc.) But the past 100+ years certainly gives enough of a history to show that valuations have a way of reverting to the mean over time. If a non-dividend stock drops dramatically in value, it should bounce back over time - as long as the business is healthy. In this regard, it's the same as an income investment. The only way it's different is if you use the income for actual real world expenses, rather than for reinvestment. If you have gotten to that point in your life, ADR investing probably isn't the best way to get income - tax free munis that protect capital are far safer.

    I'm a little investor, but I've made a pretty good chunk of money buying stocks that are trading for far less than their intrinsic value (or my opinion of intrinsic value). Sometimes the fundamentals are overwhelming, but Wall St. just needs a bump to push the stock along. As an example, Apple is in the news every day, and their iOS product lines seem to be humming along at 100% growth rates with plenty of runway left. The products are ubiquitous, profitable, proprietary, and easy to understand, but for some reason the stock basically traded sideways for most of 2011. It was a simple matter of time before the stock shot up; the price was absurdly low by any traditional valuation metric. Anyone who bought based on this simple analysis has been handsomely rewarded in the last 120 days, making much more than any dividend could ever provide.

    I love income investing, but it seems a bit myopic to exclude every other asset just for its lack of income. I bought TEF at $18 based on the same fundamentals mentioned in the article. I've received one nice dividend check, but I'm still down. The income lessens the blow a bit, and it's nice to get paid to wait, but I'll be a lot happier if the stock moves to $30 and the dividend drops to 5.5%.

  • Report this Comment On April 18, 2012, at 5:34 PM, SnowdriftFool2 wrote:

    I bought TEF around $22 as a part position and have kept buying it all the way down in small portions. I'm not sure when we will be at bottom but I bought more today at under $15 and am happy with every purchase made so far for the reasons you've outlined. This is a global company and it is definitely oversold.

  • Report this Comment On April 18, 2012, at 5:35 PM, mikecart1 wrote:

    TEF is the only one I'd consider buying. All the Supervalu's I've seen are located in crummy areas and one even had a closing recently. Their stores also look out-dated and old. Way too many better places to shop for groceries.

    Anything that has to do with natural gas is a no go for me. It isn't the place I want to put my money in when you can make so much more in oil.

  • Report this Comment On April 18, 2012, at 5:46 PM, Bsorge10 wrote:

    I am not sure if any of these are worthwhile. I owned Niska which was the worst MLP that I ever owned and has K-1 reporting. Supervalue has been in decline for a long time, Telefonica, like STD is in a bad neighborhood. I think high dividend in this case will just lead to capital losses. Terrible selections!

  • Report this Comment On April 18, 2012, at 6:47 PM, kayakmastr wrote:

    Companies become more valuable because their revenues and profits increase significantly year after year. Stock prices do not go up because some sucker is wiliing to pay more than you. Stock prices go up because some seer sees more growth than you do. Of course sometimes these seers are fools (not MFools). Dividends of down and out companies may be high, for a reason, they are down and out. If you want to profit from these companies, you buy into their recovery, not into their dividends, because they may not recover! And you will lose much more on the stock than you received from the dividend. So for example, I purchased a call on SVU, if they recover, my per cent gain will be huge, much more than any dividend that I missed. If they don't recover, the dividend would not cover my loss. Bottom line of this MF piece seems to be: buy down and out companies for their high dividend because they will recover and you will win. If you believe that, you will win even more if you buy a call.

  • Report this Comment On April 18, 2012, at 6:50 PM, xetn wrote:

    I guess the fact that NKA has a -3.00 earnings per share should just be overlooked?

  • Report this Comment On April 19, 2012, at 5:59 AM, sevenheart wrote:

    One caution on natural gas storage. The preferred method in the industry to store gas when prices crash is simply to shut in the wellhead and store the gas where it has been stored for several million years- right where it was found. History indicates that nat gas prices will probably stay low for the next 5-7 years. I would be very careful about any nat gas investments in the short term, good homework will be responsible for good investments. I've seen this scenario before after 29 years in the oil and gas industry.

  • Report this Comment On April 19, 2012, at 8:49 AM, DirkHolthusen wrote:

    In order for a stock to have upside potential (particularly stocks with substantial dividends) it is extremely important that they be able to grow or at least maintain their current level of distribution. I did not see this critical issue addressed in the article and I'm very concerned about NKA and TEF.

    I'm an engineer with little experience in reading financials but it appears to me that costs are exceeding income at NKA. How will this Company remain viable?

    It seems the Dividend will have to be cut or they will have to issue more shares. Either of these events will not be a positive event for share price.

  • Report this Comment On April 19, 2012, at 10:33 AM, slof1955 wrote:

    Westport Innovations? It's down 35% since the end of March! If that's "soaring", what's your definition of "crashing"?

  • Report this Comment On April 19, 2012, at 2:52 PM, ryangugino wrote:

    STD might be a good buy if we can find the bottom... Definitely a good one to keep an eye on...

  • Report this Comment On April 19, 2012, at 4:09 PM, roland2681 wrote:

    I am not impressed with supervalu, they took over jewel food over in the chicago area, customer service has become poor, stocking for sales is hit or miss, they dropped products we buy, they old time jewel employees are still helpful , but the company is unable to deliver service, supervalu is to expensive to compete with food for less and unable to give the old jewels service, special orders are a waste of time, the Boss drags me into many stores on her rounds and I have observed that jewel and dominicks have lost their edge, i am impressed with ultra foods strack and van, they carry two items jewel dropped that I consume and have good service

  • Report this Comment On April 20, 2012, at 11:14 AM, MisterBazzini wrote:

    There is a 19% tax on TEF dividends.

  • Report this Comment On April 20, 2012, at 12:59 PM, theScudderFund wrote:

    I can't support the Supervalu investment advice either. I am a Boise, ID native- the home of Joe Albertson and Albertson's - and I have known the Albertson's brand as long as I have been alive. Since being acquired by Supervalu the company has completely lost touch with it's roots. Where the company used to be considered a "higher end" supermarket due to it's focus on great customer service and clean, updated stores, Supervalu has interpreted Albertson's high-end market appeal as a means to more or less just raising prices. The company has lost touch with it's intimate, "customer first" feel to the extent that one wonders if Supervalu executives have ever seen an old "It's Joe Albertson's Supermarket, but the pharmacy department is yours" commercial.

    If they are that out of touch with such a large investment of their own, I don't trust the way the company is being run.

  • Report this Comment On April 20, 2012, at 3:45 PM, setht23 wrote:


    1. No where in the article does it say Westport is "soaring" It says it's been "propelled" by cheap NG

    2.If you expand your time horizon slightly you'll see Westport has done pretty well over the past year it's up 24%. Trying to say it's not doing well after a steep over correction is obnoxious. Thats like saying AAPL is doing terrible because it's down 10% in the past two weeks.

  • Report this Comment On April 20, 2012, at 4:14 PM, WineHouse wrote:

    Motley Fool has become both very motley indeed and very truly foolish indeed. Why write an article that's not worth reading? All of the negative points raised by the commentators are valid. I originally owned Albertson's stock because I live in south Florida and thought well of the chain, which was ubiquitous in the Palm Beach County area; but since its buyout by Supervalu the chain has gone so far downhill that at this point you can't even find an Albertson's around here any more -- nobody wanted to shop there, it had gotten so bad.

  • Report this Comment On April 20, 2012, at 8:39 PM, Fracguy wrote:

    I have to agree w mikehart1 and roland2681comments about Supervalu/Albertsons. They have had their hat handed to them in the Texas markets I have seen (Houston, San Antonio).

  • Report this Comment On April 20, 2012, at 8:42 PM, UFOFred wrote:

    @ BxBruce007

    MisterBazzini is correct that Spain charges 19% tax on dividends and you are correct that this causes a problem in a retirement account.

    There is a Seeking Alpha article about foreign taxes on dividends:

    --- Fred

  • Report this Comment On April 21, 2012, at 4:54 AM, Artis301 wrote:

    I'm not sure why Niska was recommended before it dashed up from $9 to $11, a little late isn't it? Just like recommending B of A at $9 onlly to watch it promptly fall to $8. My intuition was telling me to wait for it to drop. I'm listening to it from now on!

  • Report this Comment On April 21, 2012, at 4:57 AM, Artis301 wrote:

    Correction: I meant to say: I'm not sure why Niska wasn't recommended until it already made it's jump from $9 to $11 - a little late isn't it?

  • Report this Comment On April 22, 2012, at 9:32 AM, Howch wrote:

    15 years ago I briefly worked in the main Mpls warehouse of SVU. I say briefly because the working conditions and environment were so awful that I quit within a week. Mandatory Teamster dues and supervisors who treated you like a dog. "On your first day, stand on this yellow x after you clock in and someone will find you" I have done performed some physical, difficult jobs over the years and always persevered, even for less pay. Super Value was THE WORST employer I have ever had. When filling out my seperation papers, I wrote that I had been treated better in prison strip searches. Investing isn't just about numbers and balance sheets. A company that treats its employees this way may see "growth" but there will be no innovation or motivation from its workforce.

  • Report this Comment On May 16, 2012, at 7:54 PM, postguard64 wrote:

    I bought TEF after this article came out. Since then, it went up half a dollar (from ~14.50), and then fell over two, counting today, to a new 52 week low. This isn't the first time that the MF recommended stocks did not come through in the short run. I'm somewhat disappointed with acting on recommendations that they give thus far.

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