Five Cheap and Solid Dividend Stocks

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bargain hunters understand the importance of dividend yields when it comes to looking for undervalued opportunities. Dividends are more transparent than earnings or other metrics of value, and they also provide income while investors wait for the markets to overcome their excessive pessimism regarding a stock. These five companies offer juicy dividend yields and strong business fundamentals for long term value investors.

There's nothing like a sequence of bad news to create a buying opportunity in fundamentally sound companies, and that´s the case with Johnson & Johnson (NYSE: JNJ) after facing negative press regarding product recalls, regulatory uncertainties and legal complications. But the company is one of the few in the world with an AAA credit rating, and it has an unquestionable trajectory of cash flow generation.

Johnson & Johnson is working to fix its problems, and at the same time it’s investing for growth. The company holds one of the best pipelines in the industry, led by new drugs for oncology, arthritis, and cardiovascular disease. New psoriasis drug Stelara is reporting very promising sales, and it could turn into a blockbuster in 2013. Paying a 3.5% dividend yield, and with 50 consecutive years of dividend increases, this global pharmaceutical is offering an attractive valuation and remarkable financial strength.

Sysco (NYSE: SYY) is the leading foodservice distributor in the U.S. and Canada, with about a 17.5% share of this estimated $225 billion market.  The business can be hurt by rising food and energy prices, and the company makes nearly two thirds of sales from restaurants, which exposes Sysco to lackluster consumer spending. 

However, size and economies of scale are a big advantage in the food distribution industry, allowing Sysco to achieve lower costs and higher margins than its competitors. The company yields a 3.5% in dividends, which is more than double the yield on 10 year treasury bonds, currently around 1.6%.

Investing in tobacco companies can raise some ethical concerns at the personal level, and both the legal and regulatory environments can be a material risk for companies in the industry. Although Philip Morris (NYSE: PM) has never lost a tobacco-related case, the possibility of having to face large legal bills in the future cannot be discarded. Governments all over the world are trying to curb smoking, and this exposes the industry to all kind of negative news coming from the regulatory front, including increased taxes, advertising restrictions, and anti smoking campaigns.

On the other hand, the economics of the business can be very powerful; tobacco companies sell their products to addicts, and that means a very resilient demand, even in uncertain economic times. Phillip Morris owns valuable brands like Marlboro, Philip Morris and Parliament among others, and the company has big exposure to emerging markets, where Asia in particular is one of the few regions in the world showing growing demand for cigarettes. The dividend is smoking hot too, pun intended, Philip Morris pays a 3.8% yield.

Waste Management (NYSE: WM) owns a leadership position in the stable and profitable business of waste collection with 271 active landfills and 294 transfer stations in the US. In addition to that, the firm has been venturing into the recycling business, building 22 plants which transform trash into energy. This last business segment adds growth potential to the company, but it has been generating lackluster earnings due to unstable commodity prices lately. Waste Management pays a 4.4% dividend yield, and those payments are well protected by the cash flows generated in the safe and traditional waste disposal segment.

Volatile energy prices and investor concerns about the never ending crisis in Europe are a double headwind for Total (NYSE: TOT). The company has a considerable exposure to the Eurozone  in its chemicals and downstream businesses, but this is a global integrated energy play with attractive opportunities in businesses like liquefied natural gas – LNG – where Total is the second player in the world behind Royal Dutch Shell.

Total operates in a cyclical industry with high capital requirements, making it particularly sensitive to the economic scenario, but the risks seem already reflected in the company´s valuation: the stock is trading at a P/E ratio of 8.2 and it pays a juicy 4.9% dividend yield. I wouldn’t expect big increases in dividend payments over the short term, as management will probably choose to preserve cash flows until better times, but Total is still a strong company with many valuable assets and solid long term prospects.

Few things scream bargain like a big and sustainable dividend yield. These five companies are offering attractive entry points for long term value investors, and they have the necessary strength to go through a challenging economic environment in the middle term.

acardenal owns shares of Waste Management The Motley Fool owns shares of Johnson & Johnson and Waste Management. Motley Fool newsletter services recommend Johnson & Johnson, Sysco , Total SA. (ADR), and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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