The best dividend stocks are the ones with generous dividends that are sustainable, as well as bargain prices that allow investors to depend on share appreciation over time. And while this combo sounds hard to find, it’s actually pretty easy when you take a long view of dividend stocks and don’t expect your outperformance to come overnight.
After all, stocks that pay quarterly dividends are necessarily long-term investments. What’s the point of churning these picks in and out of your portfolio if you can’t collect the entirety of your yield?
For patient investors looking for income over time and long-term share appreciation, then, I’ve come up with a good list of cheap blue chips that offer generous dividends.
These picks are all cheap because they are value investments with attractive forward price-to-earnings ratios as low as 7.5, and they are generous dividend payers because all offer higher yields than the market at large and Treasuries.
If you’re looking for the best dividend stocks to buy, you have to be patient but you also have to be selective. If you’re building out your income portfolio right now, consider these five picks for both the dividends as well as the hopes of outperformance via share price in the long term.
Cheap Dividend Stocks: General Electric (NYSE:GE)
Forward P/E Ratio: 13.9
Dividend Yield: 3.6%
Rather than chasing fleeting trends, why not rely on one of the biggest names on Wall Street with one of the best track records around? That’s what you get in industrial giant General Electric Company (NYSE:GE).
Admittedly, GE did burn investors with a dividend cut during the financial crisis, but shares — and dividends — have been steadily fighting higher ever since the 2009 lows.
That trend continues in 2015 as GE reported good earnings recently that hit expectations with 4% sales growth, and beat on the bottom line. That comes even amid spending on a restructuring as General Electric continues to evolve its business, ridding itself of arms that don’t meet with its core industrial mission.
GE just spun off consumer financial services company Synchrony Financial (NYSE:SYF) in 2014, as well as a $13.5 billion acquisition of energy grid businesses from French multinational Alstom and the sale of its consumer appliances biz to Electrolux (OTCMKTS:ELUXY) for $3.3 billion.
This is cutting out some revenue, yes, but adding to margins and profits. And in the long-term that will serve investors quite well.
As for the here and now, though, General Electric is trading for a forward price-to-earnings of about 13.9 right now. And when you consider General Electric boasts over $90 billion in cash — with another $50 billion in short-term investments — it’s clear that this company is not one of these risky growth stocks dependent on sentiment alone.
Cheap Dividend Stocks: General Motors Company (NYSE:GM)
Forward P/E Ratio: 7.5
Dividend Yield: 3.2%
General Motors Company (NYSE:GM) is no stranger to hard times, from its bankruptcy and bailout to high-profile recalls over the last year or so.
But while GM stock has underperformed in the last year, its bargain pricing and hopes for higher dividends in the future make it a great long-term buy for value investors.
General Motors just committed to a big-time stock repurchase plan, promising $5 billion through 2017 on GM stock buybacks, and pledged to allocate more cash towards dividends going forward.
This was done mostly to avoid the trouble of a proxy fight from investor Harry J. Wilson, but the bottom line is that General Motors stock holders will reap the benefits — particularly since GM stock already yields about 3.2% at current prices.
What’s more, GM stock boasts a forward P/E of about 7.5 right now even before this repurchase plan. That’s less than half the average earnings multiple of S&P 500 stocks, as well as lower than its peer Ford Motor Company (NYSE:F).
Admittedly, there are headwinds given soft global auto sales, but GM stock is actually on track to turning a profit in Europe in the next year or so — even when taking into account the very expensive costs of recent recalls and related repairs.
Patient investors looking for a bargain stock with a good yield could do much worse than GM right now after this dividend and buyback news.
Cheap Dividend Stocks: Microsoft Corporation (NASDAQ:MSFT)
Forward P/E Ratio: 14.3
Dividend Yield: 2.9%
Microsoft Corporation (NASDAQ:MSFT) took a dive in January on earnings that disappointed some investors after there were signs its core Windows business was slowing down. But since the initial trouble, shares have slowly been moving higher, and there are signs the initial downward momentum was short-lived and negativity is fading.
And for long-term investors, this may hint at a great time to buy.
Remember, overall earnings weren’t so bad for MSFT stock in January: On the whole, Microsoft’s earnings were in line with expectations — revenue of $26.5 billion topped expectations of $26.3 billion, and was up 8% from the previous year. Earnings of 71 cents were down slightly year-over-year largely due to restructuring charges and currency exchange headwinds, but still hit the mark.
That doesn’t sound like a looming disaster in the works, even if the details in the core Windows business were weak.
Furthermore, its cloud business did well — as did its surface sales. Specifically, commercial cloud revenue more than doubled to an annualized run rate of $5.5 billion, and Microsoft’s Surface tablet enjoyed sales growth of 24% to more than $1 billion in total sales.
And let’s not forget the dividend and buyback machine at Microsoft that keeps humming along. Microsoft spent more than $2 billion on stock buybacks last quarter, and reaffirmed plans to complete an existing $40 billion repurchase plan by Dec. 31, 2016. There are around 8.2 billion basic shares of Microsoft stock currently, compared with 8.3 billion at the end of 2013 and almost 8.4 billion at the end of 2012.
As the company rolls out Windows 10 with hopes of higher sales this year, the price is right at Microsoft given its big dividend and fair valuation. After all, MSFT stock trades for only 14.3 times forward earnings — lower than a forward P/E of 17.7 for the S&P and about 19 for the Nasdaq.
Cheap Dividend Stocks: Dow Chemical (NYSE:DOW)
Forward P/E Ratio: 13.2
Dividend Yield: 3.5%
Dow Chemical Co (NYSE:DOW) has been under pressure for the last few months, in part thanks to activist investor Daniel Loeb taking a large stake in the chemicals giant and pushing for a spin-off of commodity-related businesses that have made DOW volatile in recent years.
After Loeb’s Third Point hedge fund took seats on the Dow board in November, Wall Street has been processing the news — and it hasn’t been good for the stock as shares have faded about 9% since Thanksgiving.
But as Dow Chemical is divesting itself of some segments to raise about $7 or $8 billion in the next year or so, it also has pledged to allocate a lot of that cash towards buybacks and dividends.
And by the way, its targeted $5 billion buyback plan and recent dividend boost from 37 to 42 cents took effect before Loeb and Third Point took power on the board. So we could see even more allocation of capital back to shareholders in the year ahead as these asset sales go down.
The challenge is that, as a multinational chemicals business that is cyclical in nature, the strong dollar is hurting margins overseas and the global industrial slowdown is sapping demand. But this will not last forever — and with an attractive forward P/E and hopes of dividend growth, a patient investor could be well-served by a position in Dow chemical right now before the dust settles.
Cheap Dividend Stocks: Accenture Plc (NYSE:ACN)
Forward P/E Ratio: 16.9
Dividend Yield: 2.3%
Accenture Plc (NYSE:ACN) is a technology consulting firm that has simply been on a tear since October, rising 16% in the past five months to nearly double the broader market’s returns in the same period.
And despite this run to a new 52-week high, it’s still fairly valued with a lot of room to rise in the months ahead.
As Dan Burrows recently pointed out, the charts look great for Accenture after a recent golden cross and right now,“ACN is in a two-month period of historical outperformance, gaining an average of 0.7% in March and 2% in April over the last decade.”
But beyond the charts and price history alone, there’s the continued hope of an IT spending recovery in 2015 as businesses continue to hire and expand. While the company doesn’t report earnings until March 26, its report from December was very strong and showed a beat on the top and bottom line, as well as growth in four out of five business groups. That bodes very well for its next quarterly report in a few weeks.
ACN is a little pricier than some of the other stocks on this list, but still boasts a forward P/E that’s lower than the S&P 500. And while its 2.3% dividend doesn’t burn the house down, it is higher than the 1.8% average of the S&P and higher also than the 10-year T-Note right now.
If you’re looking to play the growth in enterprise tech but do so in a responsible way, ACN stock offers a chance to do that effectively.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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