Everyone loves a good rally, but the market’s run to all-time highs is making it harder and harder to find bargains with big dividends.
After all, as a stock rises, its price-to-earnings multiple (P/E) goes along for the ride. The S&P 500 is currently trading at a trailing P/E of 18.6. That’s pricey by historical standards, as well as compared to this time last year when the P/E was 16.4.
At the same time, yields on dividends and stock prices move in opposite directions (as they do with bonds). So, as the S&P 500 rises, its dividend yield falls.
Furthermore, the market’s remarkable rally makes it tough to find stocks that can keep screaming higher. After all, stocks have more than doubled in five years. With valuations stretched — especially relative to growth prospects — it’s hard to see equities doubling again in the next five years.
That’s why it’s called a stock-picker’s market. And there are no better stock picks than those that offer a trifecta of outsized growth prospects, hefty dividends and bargain-basement prices.
We scoured the market for these plays, starting with smaller stocks because their modest market caps make it easier to double or even triple off a small base. We also limited ourselves to stocks with annualized profit growth of at least 20% a year for the next five years. Finally, the yield on the dividend had to be at least 5%.
Here are three of the best stocks we found: