These 3 Dividend Stocks in Lagging Sectors Can Still Be Bought

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

The Dow Jones industrial average and the S&P 500 indices have both been on quite a run, so maybe it's time to start seeing the glass as half full. There seems to be a lot of talk about "bubbles," followed by the argument that the market is being propped up by central bank bond buying around the world, especially here in the U.S

But the S&P is still only trading at 14 times 12-month forward earnings. Trailing earnings are slightly over 18 times.  Considering where bonds are currently trading, there really isn't much alternative. 

So, even with the unprecedented central bank action, we are still trading at around our historical multiples. The US Federal Reserve bank has itself said that it will not stop the bond buying until the economy is significantly stronger. With that in mind, it wouldn't be a terrible idea to consider stocks at these levels. 

Instead of making ideological statements, this article will focus on well-known, reasonably-priced dividend stocks. What it won't focus on are some of the "hot" and overvalued sectors of this market; namely utilities, healthcare and consumer staples. These are way too crowded--instead, I'll concentrate on more undervalued sectors and focus on stocks that pay a good dividend and are priced reasonably. 

Royal Bank of Canada: Biggest bank in the safest financial system

(The following stats are on American Depository Receipts listed on the NYSE)

Price to Book: 2.1

Dividend Yield: 4.1%

Financials still have a very long way to go before they reach pre-recession levels. And that's a good thing. Looking for stocks in this sector can be really difficult due to the complex balance sheets of many larger banks. The average investor can hardly be blamed for wanting to remain conservative.

It doesn't get much more secure than Royal Bank of Canada (NYSE: RY) The number-one bank in the world's most secure financial system, Royal offers safety and growth at the same time. Not to mention a dividend which exceeds that of any major bank in the US.

Royal has a common equity Tier 1 ratio of 9.3%, making it a “well-capitalized” bank by Basel III standards. Return on equity is a very nice 19.6%. In the last quarter, net Income grew by 12% year-on-year, benefiting from a Canadian economy growing faster than its developed-world peers.

Finally, Royal announced a quarterly dividend increase of 5% on its Canadian shares, which the American ones tend to follow closely.

The bank trades at 2.1 times book value, so Royal is no huge bargain here. But, you will be getting growth at a fairly reasonable price and a well-capitalized bank in the very stable Canadian financial system.

Cisco Systems: “Old tech” will deliver consistent returns

Price/Earnings ratio: 12.4 times (trailing)

Dividend yield: 3.2%

Technology stocks, especially the “old tech” cohort, which were dominant in the late 1990s, have been lagging this rally. Some haven't gone anywhere in months.

And so, I will go “dumpster diving” into old tech for my second pick. These older, mature tech companies tend to offer low P/E ratios, substantial dividends, great cash flow and double-digit return-on-equity numbers.

But tech stocks are often cheap because they are perceived to no longer be innovative, and therefore in terminal decline. For some old tech companies, such as those connected with the PC, this may be true. But not so for Cisco Systems (NASDAQ: CSCO), which is involved in Internet protocol networking for communications and IT. As one analyst put it, Cisco is “Intel without the drama.”

That's not to say Cisco's growth will be anything like it was. Its most recent earnings results showed income and sales growth in the mid-to-high single digits. Make no mistake, this company has “matured,” but management understands this fact. They also have a very smart buyback program. An investment in Cisco means moderate growth, world-class management and a dividend that will grow for years.

China Mobile: Paying you to wait for 2014

Price/Earnings ratio: 10.4 times

Dividend yield: 4.1%

China Mobile (NYSE: CHL) is the largest telecommunications company in the world by market cap and subscribers. The stock has actually declined by about 10% since the the new year.

But China Mobile does have some structural problems. While its plain vanilla voice and SMS service (2G) are very profitable, it's no longer a growing portion of the business and will likely start declining as people move to wireless data options (3G and 4G smart phones).

Unfortunately, China Mobile fell behind the other major networks in 3G. In fact, its 3G network is considered the weakest of the three big players in China and is probably not even profitable.

This is because the Chinese government wanted to improve the competitive landscape in the telecommunications sector, and so they helped the two smaller networks get a head start in 3G networks. China Unicom and China Telecom "leapfrogged" past China Mobile into 3G. This means that China Mobile has had to rely on its 2G cash cow for profits.

But don't worry, it's doubtful that China Mobile will be in decline permanently. All signs point to China Mobile being far more competitive in 4G, where it has already begun building out its network and is set to officially launch in the second half of this year. China Mobile's 4G network will hopefully refuel growth in 2014 and beyond.

China Mobile is a turnaround story. You won't get much growth this year, if any. What you will get, however, is a big dividend, a company with a clean balance sheet and possibility for growth within 12-to-18 months. At 10.4 times earnings, it's certainly not priced for perfection.

Conclusion

The stock market is priced just about at its historic norm. While things aren't as cheap as they used to be, we really have only two choices. We can be ideological and decry this rally as unsustainable, sit on our cash and do nothing--or, we can look at lagging sectors to find the companies which deliver bond-beating dividends, value and a little growth to boot. I know what I'm going to do. 


Casey Hoerth has a position in China Mobile and Royal Bank of Canada. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of China Mobile. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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