The stock market has been a dud so far this year — not fun for current investments, but at least it’s creating more cheap dividend stocks for new money. Indeed, declining share prices are a one-two punch that raises dividend yields and depresses price-to-earnings multiples at the same time.
Sure, we’d all rather have price appreciation in what we own, but at least equity income investors can get a little more bang for their buying buck.
And they sure could use it.
Yields on dividend stocks are significantly higher than they were last year, but they’re still pretty paltry compared with historical norms. The yield on the S&P 500 is now up to 2.27%, according to Birinyi Associates. A year ago, dividend stocks in the benchmark index offered a yield of just 1.97%. Neither of those numbers is good compared to the average 3.05% yield on S&P 500 dividend stocks since 1960 is 3.05%, according to New York University’s Aswath Damodaran.
In addition to less-than-stellar payouts, decent yields are hard to come by in another way: There’s just not a whole lot of choice. Only about only about 20 companies in the S&P 500 carry dividend yields of at least 4%.
On top of all that, you don’t want to overpay for yield, so you want to identify cheap stocks. After all, dividend stocks are best used as long-term holdings, and valuations tend to revert to the mean over time. That means shares with high price-to-earnings multiples are in danger of having a day of reckoning. Cheap stocks, however, can get a boost from multiple expansion.
With all that in mind — and it’s a lot — we scoured the S&P 500 for cheap dividend stocks that you should be piling into. Here are six of the best:
Cheap Dividend Stocks: Pfizer Inc. (PFE)
PFE Dividend Yield: 4%
Pfizer Inc. (PFE) is about as uninspiring a stock as you can get these days, but the pharmaceutical giant has powerful long-term demographics at its back.
The youngest baby boomers are turning 52 this year. The oldest boomers turn 70. Demand for drugs is only going up.
At the same time, Pfizer’s dividend will boost total returns, and it has the potential to keep rising. Pfizer has raised its dividend every year for six years, and it pays out less than half of its earnings in dividends.
Most importantly, PFE is a cheap stock. At not quite 12 times forward earnings, PFE trades below its own long-term average. It’s also about 28% cheaper than the broader market, according to Thomson Reuters Stock Reports.
Cheap Dividend Stocks: Verizon Communications Inc. (VZ)
VZ Dividend Yield: 4.4%
It’s hard to beat telecommunications stocks when looking for dividends now that utilities have become somewhat pricey. Verizon Communications Inc. (VZ), a component of the Dow Jones Industrial Average, offers a generous dividend at a good price.
VZ is off to a great start this year. It’s up 13% so far in 2016, which beats both the S&P 500 and the Dow Industrials by about 10 percentage points.
Happily for new money, the run-up in VZ stock hasn’t made the dividend yield or P/E off-putting just yet.
VZ trades with a forward P/E of 11.96 — an 18% discount to its own five-year average, as well as a 28% discount to the S&P 500.
Cheap Dividend Stocks: Ford Motor Company (F)
F Dividend Yield: 4.4%
Ford Motor Company (F) stock gets no respect. It was the only U.S. automaker that didn’t file for bankruptcy protection during the financial crisis, it has kept the profits flowing, and yet sentiment remains sour.
F stock changes hands at just 6.4 times forward earnings. It’s priced for little growth, but analysts figure the car company has a long-term growth forecast of more than 11% per annum.
True, demand from China remains a headwind, but sales in Europe are coming back and the U.S. is purring along.
Despite the optimism, Ford trades at more than a 25% discount to its own long-term average and a whopping 61% discount to the broader market. For context, the S&P 500 has a forward P/E of more than 16 on an annual expected growth rate of 5.3%.
Cheap Dividend Stocks: HCP, Inc. (HCP)
HCP Dividend Yield: 7.3%
The market is really down on HCP, Inc. (HCP) these days. It’s a real estate investment trust, and two of its big tenants are having a tough time right now.
But the problems in those parts of the business represent only about a quarter of the portfolio, meaning that while HCP clearly has some issues, they won’t jeopardize the company.
Meanwhile, HCP’s dividend is amazing. HCP is a proud member of the S&P 500 Dividend Aristocrats, having increased its dividend for 31 consecutive years. The fact that it’s a healthcare REIT for an aging population should also inspire confidence.
At 11.2 times forward earnings, HCP trades more than 40% below its own five-year average. Moreover, shares are cheaper than the S&P 500 by more than 30%.
Cheap Dividend Stocks: General Motors Company (GM)
GM Dividend Yield: 4.9%
Like Ford, General Motors Company (GM) has a lot of baggage to carry around. Between the government bailout and the horrible ignition switch debacle, it’s understandable that sentiment is against this name.
But those issues are well behind GM, and business is actually looking pretty good, considering the company enjoyed 8% growth in retail sales for full-year 2015.
It’s certainly better than the market gives it credit for.
Sales have been strong for three years, setting records all along the way. Profitability is improving, and China — an area of weakness for most multinationals — is a fountain of growth for the automaker.
In spite of these tailwinds, GM sports a forward P/E of just 5.3 even though it has an annual growth rate of nearly 20%. It’s 30% cheaper than its own long-term average P/E and 68% cheaper than the S&P 500.
Cheap Dividend Stocks: AT&T Inc. (T)
T Dividend Yield: 5.1%
You can’t talk about cheap dividend stocks without including AT&T Inc. (T). This behemoth of a telecom routinely has one of the highest payouts in the benchmark index.
The big dividend has allowed T to crush the market on a total return basis. Over the last 10 years, T stock generated a total return of 141% vs. 84% for the S&P 500.
T is also a great stock for playing defense. A five-year beta of 0.27 means it’s far less volatile than the S&P 500, according to S&P Capital IQ.
Throw in a forward P/E below its five-year average and the broader market has T stock priced to move.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
