With the stock market flat-lining this year, investors seem to be taking a cautious approach. There is a great deal of uncertainty lingering over the market, including the strong U.S. dollar, and a generally weak first-quarter earnings season.
The good news? There are some high-quality companies on sale. Even companies with strong brands, strong profitability and high dividend yields are being sold.
With all this in mind, it may be time for investors to look for cheap dividend stocks. Two stocks that look abnormally cheap right now are Apple (NASDAQ: AAPL) and Wells Fargo (NYSE: WFC).
Apple Fears Have Gone Too Far
Investor sentiment surrounding Apple continues to be very pessimistic. Much of this is due to the company’s last earnings report. It’s true that the results were not what analysts were looking for. Apple’s total revenue fell 13% year over year.
The biggest disappointment was iPhone sales. Unit sales of Apple’s flagship device declined 32% just from the previous quarter. That is a steep collapse, and is especially worrying since the iPhone represents almost two-thirds of Apple’s total revenue.
However, what investors are missing is that Apple is about to release a new version of the iPhone — the iPhone 7, which the company is expected to announce in September. Until then, it is reasonable for consumers to delay buying iPhones.
Apple could also see growth from the newly released iPhone SE. It is a lower-price version, which could be a hit in the emerging markets like India. Apple has only a small share of the smartphone market there, and the iPhone SE model is designed specifically to compete with lower-end competitors in new geographic markets.
Plus, Apple faces very difficult comparisons. Sales were elevated after the iPhone 6; but the good news is it won’t be long until Apple rides another iPhone wave of growth.
At a price-to-earnings ratio of 11 for Apple stock, compared to more than 20 times earnings for the S&P 500, Apple seems too cheap. It’s even cheaper after excluding its massive cash pile, which consists of more than $200 billion in cash and investments.
The stock also pays a solid 2.2% dividend, and Apple has mentioned a desire to raise dividends by 10% per year.
A Cheap Dividend Stock Among Financials
Financial stocks like Wells Fargo have had a difficult year. Interest rates are still at rock-bottom levels, a side effect of the Federal Reserve’s easy monetary policy over the past several years. But the Fed raised interest rates in December, and are likely to do so again soon, perhaps as early as next month’s meeting.
This could be the catalyst that financial stocks sorely need. Wells Fargo stock is down 7% year-to-date, and is 14% off its 52-week high. The reason is because Wells Fargo’s earnings have suffered from low rates. Earnings per share declined 4% last quarter.
Even though low rates have suppressed Wells Fargo’s interest margin, it is benefiting from higher deposits. Last quarter, deposits and total revenue rose 4%.
Fortunately, higher interest rates would be a big boost to Wells Fargo. It is the biggest mortgage originator in the U.S., and higher interest rates would lift mortgage rates as well.
Wells Fargo is highly profitable, and has a strong credit portfolio. The company earned $5.5 billion in profit last quarter alone. Plus, its net charge-offs were just 0.38% of its total loans. If and when rates rise, Wells Fargo will be able to earn more from its loans, while the money it pays on short-term deposits will increase more slowly.
Because of this, the stock looks like a bargain at 12 times earnings. Wells Fargo offers investors a solid 3% dividend and raised its dividend earlier this year. With higher rates over the next year, its dividend growth will likely continue. Wells Fargo is among the cheap dividend stocks and pays investors to wait for better business conditions.
Disclosure: The author is personally long AAPL.