The 7 Best Cheap Dividend Stocks to Buy Now

These undervalued picks yield +3% each

By Jeff Reeves

http://bit.ly/2aKWVla
Risk-Tolerant Investors Should Consider a Position in Ford Stock

Source: Sean Davis via Flickr (Modified)

The best cheap stocks to buy now are not necessarily those trading for $1 or $2 a share — particularly when you’re talking about dividend stocks.

The 7 Best Cheap Dividend Stocks to Buy NowAfter all, picks trading that low often have gone through hard times. And while you can sometimes catch a falling knife and make a bundle on a swing trade, cheap dividend stocks are inherently long-term investments.

I mean, what’s the point of buying an income investment only to trade out of it before the ex-dividend date?

As the old saying goes, price is what you pay but value is what you get. So instead, investors should look at valuation metrics and payout ratios to determine which are the best cheap dividend stocks to buy now.

I recently ran a stock screen to uncover income investments that fit the following criteria:

  • Comfortably profitable
  • Larger than $1 billion in market value
  • Trading for a price-to-earnings ratio of less than 7.5x next year’s earnings
  • A dividend yield of more than 3%

A number of companies popped up, including some volatile picks or overseas companies that only pay dividends once or twice a year.

So I hand-picked the seven best cheap dividend stocks and, I think you’ll agree, found a great grouping of high-quality companies that are bargains at current prices.

Here they are:

Best Cheap Dividend Stocks: GameStop Corp. (GME)

  • Best Cheap Dividend Stocks No. 1 - GameStop Corp. (GME)Sector: Specialty retail
  • Market Cap: $3 billion
  • Dividend Yield: 4.8%
  • Forward P/E: 6.9 vs. 18.4 for the S&P 500
  • Year-To-Date Performance: 10% vs. 5% for the S&P 500

It may be a surprise to see GameStop Corp. (NYSE:GME) on this list; the first knock against GME is that it’s a brick-and-mortar retailer in the age of e-commerce, and the second is that it sells physical video games in an age of mobile gaming and downloadable content that doesn’t need a cash register as part of the transaction.

However, there is still more than enough here. It’s fair to say that many investors have given up on GameStop, and now this retailer is one of the best cheap dividend stocks, with a lot of promise after it has rolled back in recent years.

GameStop is soundly profitable and paying out less than 40% of its earnings as dividends, so don’t think this big-time yield is an accounting trick. GME is one of the best cheap dividend stocks to buy now.

Best Cheap Dividend Stocks: Ford Motor Company (F)

  • Best Cheap Dividend Stocks: Ford Motor Company (F)Sector: Automakers
  • Market Cap: $47 billion
  • Dividend Yield: 4.7%
  • Forward P/E: 6.3 vs. 18.4 for the S&P 500
  • YTD Performance: -15% vs. 5% for the S&P 500

Ford Motor Company (NYSE:F) has had a rough year, including missing its second-quarter earnings and recently seeing its shares take a tumble again.

However, as InvestorPlace Feature Writer Dan Burrows recently wrote in his Q2 wrapup, “Ford earnings could very well be peaking, but it’s not like anyone was willing to pay much for profits in the first place. We’re talking about a stock with a five-year average price-to-earnings multiple of 8.6.”

The fact that Ford’s P/E ratio has slumped even further below its historical norm after recent earnings makes this automaker even more attractive, with a bargain valuation and a 4.7% dividend yield. You don’t need growth with income potential like that — and since it has already been beaten down, Ford is one of the best cheap dividend stocks to buy now that negativity has been priced in.

Best Cheap Dividend Stocks: Prudential Financial Inc (PRU)

  • Best Cheap Dividend Stocks: Prudential Financial Inc (PRU)Sector: Insurance
  • Market Cap: $33 billion
  • Dividend yield: 3.7%
  • Forward P/E: 7.2 vs. 18.4 for the S&P 500
  • YTD Performance: -9.4% vs. 5% for the S&P 500

Insurance stocks like Prudential Financial Inc (NYSE:PRU) have been under pressure in the last year or so, as the promise of “liftoff” for interest rates hasn’t exactly panned out.

After all, insurers have a lot cash on their balance sheets representing the “float” between when premiums paid in and claims are paid out … but low-risk, short-term assets are really the only place to park that cash, and these assets yield next to nothing in the current environment.

However, that reliable cash flow continues to support a robust dividend at Prudential, meaning investors have plenty of incentive to wait for a more favorable interest rate environment. PRU is one of the best cheap dividend stocks to buy now.

Best Cheap Dividend Stocks: Navient Corp (NAVI)

  • Best Cheap Dividend Stocks: Navient Corp (NAVI)Sector: Financial services
  • Market Cap: $4 billion
  • Dividend yield: 4.5%
  • Forward P/E: 6.9 vs. 18.4 for the S&P 500
  • YTD Performance: 19% vs. 5% for the S&P 500

Navient Corporation (NASDAQ:NAVI) is a student loan company, formerly known as Sallie Mae, that has recently been on an upswing after bottoming out at the beginning of the year.

However, after significant outperformance, this cheap dividend stock still trades at about seven times next year’s earnings.

It also is paying out less than a third of those earnings in its current dividend payout, meaning the generous 4.5% yield in NAVI is not just sustainable but likely to move higher. The expensive nature of college in America right now is a sad reality, and for better or worse, that will continue to provide a tailwind for lenders like Navient.

Best Cheap Dividend Stocks: Huntsman

huntsman corp hun

  • Sector: Chemicals
  • Market Cap: $4 billion
  • Dividend yield: 3.2%
  • Forward P/E: 7.3 vs. 18.4 for the S&P 500
  • YTD Performance: 32% vs. 5% for the S&P 500

Huntsman Corporation (NYSE:HUN) is one of the few small-scale chemicals stocks that still exist, and in all honesty is one of the best cheap stocks to buy in part because it is very likely going to be buyout bait for a chemicals king like Dow Chemical Co (NYSE:DOW) or E I Du Pont De Nemours And Co (NYSE:DD).

But this is a piece about dividend stocks, so don’t just jump into HUN with the hopes of a big acquisition and a short-term pop — believe in the long-term income potential of this dividend payer trading at just 7 times earnings.

Best Cheap Dividend Stocks: KKR & Co, L.P. (KKR)

  • Best Cheap Dividend Stocks: KKR & Co, L.P. (KKR)Sector: Financial services
  • Market Cap: $12 billion
  • Dividend yield: 4.4%
  • Forward P/E: 6.7 vs. 18.4 for the S&P 500
  • YTD Performance: -10.1% vs. 5% for the S&P 500

Global investment group KKR & Co. L.P. (NYSE:KKR) fell hard in mid-2015 and hasn’t really recovered. However, it continues to trade at a bargain valuation of about 7 times earnings. And while earnings are set to slump in the current year, Wall Street is expecting double-digit top line growth next year and a return to significant earnings growth.

To top it off, the dividend yield of 4.4% is based on the company’s last quarterly payout of 16 cents — the lowest distribution since Q2 2012. When earnings improve and payouts improve in kind, this cheap dividend stock could be a tremendous part of your income portfolio.

Best Cheap Dividend Stocks: MetLife Inc (MET)

  • Best Cheap Dividend Stocks: MetLife Inc (MET)Sector: Insurance
  • Market Cap: $46 billion
  • Dividend yield: 3.7%
  • Forward P/E: 7.1 vs. 18.4 for the S&P 500
  • YTD Performance: -12.8% vs. 5% for the S&P 500

As with Prudential, Insurance stock MetLife Inc (NYSE:MET) has also seen underperformance in a low-interest-rate environment. But this large-cap financial stock is paying a juicy dividend and is trading for a steep discount to next year’s earnings compared with the rest of the market.

It’s also worth noting that while MET revenues are stagnant, earnings are on a strong upward trend — from $4.86 in EPS last year to $5.37 this year, a 10.5% lift, and to a projected $5.89 next fiscal year for another 15% increase. With a growing bottom line and strong income, MetLife is a great cheap dividend stock to buy now.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/08/cheap-dividend-stocks-buy-now/.

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