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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

3 Stocks Able to Begin Dividend Payments for a Substantial Payoff

NEW YORK (TheStreet) -- Dividend-paying stocks are usually the only equities I recommend when asked by friends what they should have in their portfolio as a long-term holding. Investors have historically increased their odds of success by limiting their allocations to investments with a yield.

Originally, a dividend payment was the catalyst for to invest and risk capital and all stocks that were able paid one. The emphasis on long-term holding shifted towards price speculation as market transaction efficiencies improved, and costs declined.

Many stocks could pay a dividend but currently choose not to. Some are more likely than others to begin. I search for companies that are more likely than average to begin paying dividends. It can take a long time between identifying a likely candidate and the Board of Directors pulling the trigger and declaring one -- however, when you get it right, the payoff can be substantial.

 LULU Cash and Equivalents (Quarterly) Chart

Vancouver-based Lululemon Athletica (LULU) designs, manufactures and distributes athletic apparel and accessories for women, men and female youth. The company trades an average of 1.9 million shares per day with a market cap of $6.3 billion.

Analyst opinion is mixed. Most of the analysts surveyed don't believe a buy or sell should be made at this point. Currently, Lululemon has 16 buy recommendations out of 33 analysts covering the company, 14 holds and three recommend selling. The average analyst target price is $57.14.

After changes in leadership and product challenges caused investors to rethink Lululemon as an investment, the shares dropped almost in half since 2013 highs. Despite Wall Street's reservations and the stock's poor performance, the company continues to execute well.

The company has met or beat estimates in 15 out of the last 15 quarters. Lululemon is essentially debt-free and the cash continues to stretch higher.

Analysts estimate the company will earn about $1.89 per share this year and about $2.24 next. Short-sellers have viciously shorted this stock but I think it's reaching a point that the scale is tipping in the favor of shareholders.

As of the last earnings report, about one out of every four shares is shorted. As an active short-seller with years of experience, I know when a short thesis is crowded. Lululemon is one of the most perfect short-squeeze candidates that I've seen in months.

It's the equivalent of a ticking time bomb for short-sellers. I don't think it's a matter of if but when it blows up in the shorts' faces. From a technical analysis, a valid argument could be made a year ago that the shares were ahead of themselves, but that was then and this is now.

Earnings are growing at a rapid clip. The price-to-earnings multiple is pricing flat growth and the number of outstanding shares is stable. The only negative I can find is insiders aren't buying yet. However, insiders are notoriously bad market timers, and if I have to pick a negative this is my first choice.

Athletic apparel maker Nike (NKE) pays a dividend yield of 1.2% from a 30% payout ratio. If Lululemon paid 30% on forward earnings, the dividend would be about 65 cents, for a yield of 1.5%.

 

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