$5 Funeral Home Stock Pays Dividends

Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's David Peltier joined NBR to talk about dividend stocks priced under $10 a share. (Watch video and read transcript)

Low-dollar stocks and companies that pay dividends are my two favorite investment areas, and Stewart Enterprises (STEI) is a name that offers both.

The company is a leading operator of funeral homes and cemeteries, with over 300 locations. Stewart Enterprises has been in business for 100 years and operates in about half of the states across the country.

Trading at $5.62 Tuesday afternoon, the stock is up about 9% year-to-date, but could potentially move higher over the coming quarters. The company posted 4% year-over-year revenue growth in the most recent quarter. Stewart Enterprises' business model is resilient to general economic pressures, and management is expanding its margins by keeping a tight lid on costs.

As a result, Stewart Enterprises is on track to generate 35% compound annual earnings growth through 2011, to $0.40 a share. At 14 times expected forward earnings, the stock remains attractively valued.

At current levels, the stock yields 2.2%, which is higher than the average S&P 500 stock. Last year management raised the company's quarterly payout to $0.03 a share. Stewart Enterprises will likely declare the next payment in January and I believe that management has room to boost its dividend, given the recent earnings momentum. In the meantime, the company has used its solid free cash flow to pay down debt and repurchase stock.

Stewart Enterprises is a steady growth stock that is currently flying below the market's radar. As the company continues to return its steady cash flow to investors through dividends and buybacks, the shares could potentially trade up toward the high single-digits over the coming quarters.

David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.