5 Cheap Dividend Stocks for Prudent Investors
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Value investors buy stocks of companies that appear to be priced below their intrinsic values based on financial metrics such as price-to-earnings ratios, price-to-book ratios, or dividend yields. A value investment strategy has proven to produce greater risk-adjusted returns than alternatives. Prudent value investors can attempt to achieve higher returns by uncovering undervalued companies that boast an appreciation potential and dividend payouts that provide current income.
Nuveen Dividend Value Fund (FFEIX), ranked by Barron’s as one of the top dividend funds, consists of 89 stocks of high-quality, dividend-paying companies with above average current income or dividend growth, and a value bias. While the fund’s largest holdings include mega caps such as Pfizer (PFE), Verizon Communications (VZ), and Chevron (CVX), they also include some less-known dividend plays that represent attractive value and income investments. Here is a closer look at the fund’s five value dividend stocks with yields exceeding the average yield on the S&P 500 index.
Maxim Integrated Products (NASDAQ: MXIM) is an $8.6-billion producer of linear and mixed-signal integrated circuits. It is a dividend achiever that has raised dividends uninterruptedly since 2003. The chipmaker pays a dividend yield of 3.2% on a payout ratio of 76% of trailing earnings and 59% of free cash flow.
Over the past five years, its dividend grew on average by 6% annually. This year, the company hiked its dividend by a larger-than-average 9.1%. The company’s dividend growth is likely to be sustained as its EPS CAGR is forecast to accelerate to 13.5% for the next five years, double the rate over the past five years.
Maxim’s business is driven by the fast-growing smartphone market. In fact, the company is a leading supplier for Samsung’s Galaxy S III, which has seen explosive growth. Maxim is a major producer of mixed signal and analog integrated circuits, which are expected to grow faster than other chip segments. The company has no long-term debt. With a forward P/E of 16.4x, Maxim’s stock is discounted relative to its industry (forward P/E of 16.8x). Billionaire fund managers Jim Simons and Ken Griffin are bullish about this stock.
Westar Energy (NYSE: WR), with a market capitalization of $3.7 billion, is the largest electric utility in Kansas. Currently, its dividend yields a high 4.5% on a payout ratio of 67%. The utility has raised dividends for seven consecutive years. Its dividend grew on average by 4.1% per year over the past five years. Westar Energy’s EPS CAGR is forecast to accelerate to 6.6% for the next five years from a mere 0.7% per year achieved over the past five years.
The utility’s forward P/E of 13.9x is below its industry’s average ratio of 15.4x. Its dividend is higher than the average for its industry. The company is growing through diversification of energy supply sources and building of transmission capacity. Westar Energy is popular with RenTech’s Jim Simons.
Aflac (NYSE: AFL) is $26-billion supplemental health and life insurance provider in Japan and the United States. It is Japan’s largest insurance company in terms of individual insurance policies. The company is a dividend aristocrat that has boosted dividends for 30 consecutive years. Its dividend yield is 2.6% on a low payout ratio of 23%.
Aflac’s dividend growth over the past five years averaged nearly 11% per year. Given its low payout ratio and the forecasted EPS CAGR of 10.2% for the next five years (faster than 7.2% achieved over the past five years), dividend growth is likely to be sustained.
Aflac derives 83% of its revenues from Japan, where it is experiencing robust growth. It is holding substantial yen-denominated assets. However, in recent years, Aflac has been building up its investment position in U.S government and corporate bonds. The U.S. Affordable Care Act requirement that all U.S. citizens have health insurance will likely bolster the insurance provider’s growth in the U.S. market.
Aflac has a strong balance sheet, with little debt, and is a robust cash flow generator. Notwithstanding its trading close to a 52-week high, Aflac’s stock has a low P/E of 8.0x, on par with the life insurance industry. Citadel Investment’s Ken Griffin is particularly bullish about Alfac.
Occidental Petroleum (NYSE: OXY) is a $64-billion integrated oil and natural gas producer. The company has raised dividends each year since 2002. Its dividend is yielding 2.8% on a payout ratio of 30%. Occidental Petroleum has seen robust dividend growth, averaging 18.1% annually over the past five years. The firm’s revenue growth is expected to resume next year with a 5% sales increase. For the next five years, its EPS CAGR will average about 9%.
The stock is trading well below its five-year valuation metrics such as price-to-book, price-to-sales, and price-to-cash flow. With a forward P/E of 11.0x, the stock is at a discount to its industry (forward P/E of 14.1x). Its rival ExxonMobil’s (XOM) forward P/E is almost on par with that of OXY, while Chevron is cheaper than OXY based on the same metric. Among fund managers, Ric Dillon of Diamond Hill Capital and Relational Investors’ Ralph Whitworth are big investors in the stock.
Allegheny Technologies (NYSE: ATI) is a $3.2-billion specialty metals producer with customers in the aerospace, defense, automotive, and medical industries. The company’s dividend is yielding 2.4% on a payout ratio of 44%. Its dividend has been flat at $0.18 per share since 2007. Analyst forecast the company’s EPS CAGR at 15%, which is highly dependent on the global economic rebound.
The company remains optimistic about it long-term growth prospects, in particular in China. However, it is dependent on raw materials, whose elevated prices remain a source of pressure on the company’s performance. ATI is trading at price-to-book, price-to-sales, and price-to-cash flow ratios well below industry averages. However, with a forward P/E of 19.1x, the stock is quite expensive relative to its peer group on average (forward P/E of 14.4x). Billionaire Jim Simons is a buyer of this stock.
This article is written by Serkan Unal and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Aflac. 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!