You can find plenty of stocks with low price-earnings ratios and high dividend yields—usually a winning combination. Look closely at the underlying companies, however, and you may find balance sheets buckling under weighty debt loads or deteriorating profits, making the stocks much less of a bargain than they appear on the surface.
More promising are dividend-paying stocks that have solid long-term prospects but appear to have hit some speed bumps. Buying these stocks involves taking a chance that their businesses will revive. In exchange for that risk, you can get stocks with low P/Es and above-average yields. If the companies’ turnaround plans show even modest signs of success, the stocks could take off. One stock in this camp is International Business Machines (symbol IBM, $148.14), a favorite of Warren Buffett. United Technologies (UTX, $93.31) also looks like a promising turnaround candidate. Clothing retailer Gap (GPS, $32.23) has plunged deep into the bargain bin, tumbling 26% this year.
Source: Kiplinger
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