Last week, I wrote about the three dividend aristocrats that had both the highest yields and longest histories of raising dividends. This week, I’m taking a different approach. I thought it would be interesting to see which dividend aristocrats might be the most undervalued.
I did a screen for those stocks that had a combination of the best dividend yields, the lowest payout ratios, and the highest earnings yields.
The purpose of this screen is to reduce the risk we take when investing in dividend stocks, even those with long histories of raising dividends. A 4% or 5% yield is nice, but it won’t be much consolation if your stock falls 25% because it is overvalued.
Here’s what I found out in a search for the most undervalued dividend aristocrats:
Johnson & Johnson (NYSE: JNJ) came as a bit of a surprise as No. 7 on the list. Its business has been moribund for a while. Nevertheless, with earnings yield of 5.7% and dividend yield of 2.7%, it scoots into seventh place. Its payout ratio is a very safe 48% and it has been increasing its dividend every year since 1963.
Cincinnati Financial Group (NASDAQ: CINF) is going to turn some heads. What is this company? Why haven’t I heard of it? It has quietly been writing all kinds of insurance policies since 1950, and raising its dividend every year since 1961. With its 5.8% earnings yield, and 3.4% dividend yield, it slides into sixth place. It also has a very manageable payout ratio of 60%, highest in the group. We love insurance companies for dividends, because insurance is all about collecting more in premiums than paying out in claims, and CINF excels at it.
No. 5 on this list is an asset-management firm that you may not have heard of. The only reason I know about Franklin Resources Inc. (NYSE: BEN) is because a friend often speaks of the money in his “Franklin Fund.” Mutual fund and asset management companies pay good dividends because they collect management fees no matter how bad the market is. It has a 7.3% earnings yield but only a 0.9% dividend yield.
In fourth place is The Chubb Corp. (NYSE: CB), with its insurance business. Earnings yield is 8.8% and dividend yield is 2%.
Oil prices could go to $10 and I bet ExxonMobil Corp. (NYSE: XOM) wouldn’t bat an eye. It sure didn’t the last time oil dropped that low! ExxonMobil came in as No. 3. Energy stocks are usually great places to find dividends because demand for energy is perpetual. Over the decades that this venerable explorer/producer has been in operation, it manages to spend tens of billion in capex to keep up with technology and maintenance, but also manages tens of billions in free cash flow. That’s where the money for its 3% dividend yield comes from, along with its 9.1% earnings yield. Even with oil in its current freefall, the payout ratio is a measly 33%.
Just ahead of it in second place is peer Chevron Corp. (NYSE: CVX), with its 9.9% earnings yield and 4% dividend yield. Like its counterpart, it has a broad moat around its dividend, with a payout ratio of only 41%.
Any guesses as to what line of business occupies the No. 1 stock in this screen? Sure enough, we are back to insurance, with the white duck that screams Aflac (NYSE: AFL)! The duck may be a relatively new marketing campaign, but Aflac has been paying its dividend since 1983. It has the top earnings yield at 11.2%, and fourth-highest earnings yield of 2.6%. It also has the lowest payout ratio at only 2.3%.
Time to move on up – to Dividend Avenue
It’s one of the ritziest addresses in America – and the companies that call this place home pay out some of the fattest yields in the market. With the average yield of the Dow down to 2.1%… we’ve found an opportunity on “Dividend Avenue” that pays a whopping 12%! And you can start collecting big monthly dividend… and additional payouts every 30 days.