Do you love a “deal?” Do you want need to get paid by your investments? If so, look no further.
Investing in dividend paying stocks is a tried and true way to grow your portfolio. And when you can buy undervalued dividend stocks, you’re in a great position to make a decent profit.
This relatively simple strategy involves focusing on stocks that are yielding more than the 10-Year U.S. Treasury note, while also trading cheaply from a P/E to growth (PEG) standpoint.
Even after the impressive rebound for stocks since 2009, there are still a number of industry leading companies that trade rather cheaply. This has happened for a couple different reasons. First, many investors have simply failed to re-invest in beaten down industries, such as the U.S. auto sector. Other companies have simply been overlooked because investors remain enamored by high tech and growth stocks.
Market leading companies remain great ways to find “safe” dividend paying stocks, but every once in a while the market presents an opportunity to buy these stocks at very attractive prices. That’s what’s happening with these four dividend stocks.
Undervalued Dividend Stock #1: Dow Chemical (NYSE: DOW)
Dow Chemical is definitely an “unsexy” business. Even still, billionaire activist investor Daniel Loeb and his Third Point hedge fund have a large stake in the chemical company, hoping to shake up the company structure. In an effort to fight off Loeb, Dow Chemical recently tripled its share buyback program and upped its dividend payment by 15%. The company sports a diversified revenue stream, generating money from petrochemicals, agriculture and pharmaceuticals.
Dow has paid a dividend for over thirty years. It’s currently paying a 3% dividend yield. Plus with a trailing P/E ratio of 13, the stock is the cheapest among major peers, which include Du Pont (NYSE: DD) and Huntsman Corporation (NYSE: HUN). Its dividend yield also dwarfs these two competitors.
With a payout ratio that’s only 37%, Dow has plenty of cash to fund its dividend program. Additionally, the company’s balance sheet is rock solid, with cash equal to nearly 10% of its market cap. Those traits make it clear that Dow is poised to continue increasing its dividend payout.
Undervalued Dividend Stock #2: Lorillard (NYSE: LO)
The tobacco companies are cash flow generating machines. When you think of cigarettes, you likely think of Altria (NYSE: MO). While Lorillard is less well known, it’s the market leader in menthol brand cigarettes. And it also has a strong presence in electronic cigarettes — owning over half the market with its Blue e-cig brand.
There’s currently speculation that Reynolds American (NYSE: RAI) and Lorillard could merge. A marrying of two of the largest tobacco companies would be a big positive for shareholders. Synergies for the deal could be as high as $400 million, which is just under 10% of Lorillard’s revenues. This would be money that investors would no doubt see either via dividend increases or additional share repurchases.
As far as its dividend goes, the 4.7% dividend yield is the highest dividend yield of our four stocks. Its balance sheet is one of the best in the business, with nearly $5 billion in cash. That’s over 25% of its current market cap. Despite the healthy dividend, Lorillard shares trade at a reasonable 15-times EPS estimates for 2014.
Undervalued Dividend Stock #3 General Motors (NYSE: GM)
After its bankruptcy and government bailout in 2009, the media was quick to call GM “Government Motors.” However, as of the end of 2013, the U.S. Treasury no longer held a stake in GM, ending its over four year ownership. Shares have been almost flat over the last three and a half years, during a time when the S&P soared. But with the government now out of the picture, GM could be set to move higher.
GM is also one of the newest high-income plays in the auto industry. It just reinstated its dividend earlier this year and paid its first dividend in six years. The yield of 3.5% is a bit higher than top rival Ford. Plus, it’s PE / Growth ratio (PEG) of just 0.5 shows that GM stock is cheap relative to its growth rate.
Undervalued Dividend Stock #4: Ford (NYSE: F)
Unlike General Motors, Ford escaped the financial crisis without the taint of bankruptcy. However, it’s still managed to underperform the top auto seller, Toyota Motors (NYSE:TM), over the last three years.
Ford reinstated its dividend in 2012 and is already offering investors a 3.3% yield. That’s only a 23% payout, well below what General Motors is paying out in dividends. There’s plenty of room for management to double its dividend payment over the couple years. Earlier this year, Ford increased its dividend payment by 30%.
Shares of Ford are cheap, trading at just 9-times trailing EPS. Ford has more exposure than GM to the struggling European market. However, as the economy there turns around, it should be a big positive for the car maker. Ford’s PEG ratio makes the company another cheap auto stock that is offering an impressive dividend.
While no investment is a sure thing, buying undervalued dividend stocks helps build in some downside protection. You’ll be able to collect dividends, and the low valuations of these stocks should lead to capital gains. Simply put: buying inexpensive stocks that have a history of rewarding shareholders is a great way to build wealth.
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