In this technology-centric market, I wanted to find some cheap stocks to buy with high-yields, and whose earnings power would be sufficient for the dividends. In turn, this will allow investors to receive present income while they also wait for the underlying stock to recover to their previous highs.
Additionally, another advantage is that investors can use these stocks in a “barbell,” so to speak, investing strategy approach. This is where you put higher-valuation technology stocks in one portion of your portfolio. Typically, though, these stocks do not pay dividends. So, on the other end of the “barbell”, you invest an equal or nearly equal weight in cheap high-yield dividend stocks.
In turn, this allows you to benefit from both worlds: growth and value investing. It helps your portfolio to have present income, and the possibility of offset gains from each type of investing. Thus, when your growth stocks start to falter, the cheap high yield stocks will tend to move up — and vice versa.
With all of that in mind, I’ve honed in on a few that have expected earnings and/or free cash flow for the next year. However, they still sell for less than eleven to twelve times earnings for next year. In addition, the average dividend yield of this group is two to three times the average dividend yield of the S&P 500.
So, here are the five cheap stocks to buy:
- NetApp (NASDAQ:NTAP)
- Investors Bancorp (NASDAQ:ISBC)
- Keycorp (NYSE:KEY)
- Phillips 66 (NYSE:PSX)
- AT&T (NYSE:T)
Let’s dive in, and look at these stocks.
Cheap Stocks to Buy: NetApp (NTAP)
Market Capitalization: $10.05 billion
Dividend Yield: 4.5%
NetApp is a physical flash array and cloud-based data storage company. For the current fiscal year, earnings are expected to take a dip to $3.27 per share from $4.05 last year. However, in 2021, analysts polled by Yahoo! Finance expect its earnings power to rebound back to $4.02.
Meanwhile, this company’s earnings more than cover its annual $1.92 dividend. It is also one of the few technology stocks that also buys back its shares. In fact, one of its chief advantages of buybacks is that it allows a company to continue to grow its dividend per share without any further outlay of cash.
That said, my analysis of the stock is that it is worth significantly more than its present price. For example, the average dividend yield for NTAP stock over the past four years, according to Seeking Alpha, is 2.37%. Today, its yield is 4.5%.
That implies that if the stock were to rise to the point where it enjoyed its average yield, the stock would be worth $81.01 — or 91% above today’s price.
Moreover, another way to value NTAP stock is to look at its average price-to-earnings (P/E) ratio. That said, Morningstar has a page showing that the average P/E ratio over the past five years was 27.3 times. Applying that ratio to NetApp would give it a target price of $89.68.
So, the average of these two methods provides a potential upside target price of $85.35. That represents a gain of 102%. Additionally, if that took three years to achieve, the average compounded return annually would be 26.4% each year. And if you add in the annual 4.5% yield, the total return would be over 30% annually.
That is a pretty good ROI, and NTAP is a pretty good cheap stock to buy.
Investors Bancorp (ISBC)
Market Cap: $1.95 Billion
Dividend Yield: 6.2%
Investors Bancorp is a New Jersey headquartered bank with 154 branches in New Jersey and New York. ISBC stock is very cheap, priced at $7.77 for just 73.5% of its $10.57 tangible book value.
Moreover, the dividend yield for ISBC stock is attractive at 6.2%. And over the last 12 months, the company made 73 cents per share — which more than covers its 48 cents dividend per share. Additionally, the stock trades for just 10 times expected earnings for next year. And if you put all of these things together, you have a very cheap stock to buy.
Obviously, the bank has been hit by the real estate troubles. And even with loan provisions it still made 18 cents per share in Q2. This more than covered the 12 cents per share quarterly dividend.
My estimate of the company’s value is $14.95 per share, or 88 percent above the price today. This may take two or three years to recover, but that implies an annualized compound return of 23.4% in each of three years.
And, with the 6.2% dividend yield, the stock has an estimated annual total return of over 29% annually. Again, that is a great ROI.
Cheap Stocks to Buy: KeyCorp (KEY)
Market Capitalization: $12.46 Billion
Dividend Yield: 10.4%
KeyCorp is a Cleveland based bank with almost 1100 branches in 15 states. Currently, the bank has $171 billion in assets and $15.6 billion in shareholders’ equity. More importantly, though, KEY stock trades for just 94% of its $13.07 tangible book value per share.
Overall, KEY stock has an attractive 10% dividend yield and trades for 10 times forward earnings. And in the last 12 months, the company made $1.12 per share — which more than covers its 78 cents dividend per share. And this was after taking a $482 million credit loss provision.
Nevertheless, its revenue for Q2 was up 17% in quarterly succession — mainly from fees, consumer banking and its capital market division.
Based on its 3.15% average annual yield over the past four years, KEY stock is worth over $40 per share. That represents a price rise of over 200% more than today’s price.
In addition, based on its average P/E ratio over the past 5 years the stock is worth 48% more. In fact, on average, it is worth $29.30 — or 130% over today’s price of $12.77.
So, assuming it takes three years to reach this price, the average annual gain on a compounded basis is 33.7% annually. And with the dividend yield, the company expected return is over 43% annually for the next three years.
Phillips 66 (PSX)
Market Capitalization: $27 Billion
Dividend Yield: 6%
Phillips 66 is a downstream and midstream company that owns or has stakes in 13 refineries. It was spun off from ConocoPhillips to its shareholders in April 2012. And right now, the company pays a 90 cents per share quarterly dividend, or $3.60 per share annually. Overall, at the current price of $61.79 per share, PSX stock has an ample 6% dividend yield.
That said, this high yield is more than covered by the company’s expected earnings by next year. For example, analysts expect Phillips 66 to make $1.08 this year and $5.42 per share in 2021.
Nonetheless, the high numbers for 2021 obviously depend on the price of oil rising next year. This is based on the economy returning to normal with a Covid-19 vaccine that is effective and abundantly available.
So, based on the company’s average historical yield and average historical P/E ratio, PSX stock is worth $120.87 per share. That represents a gain of 101% in the stock price.
And, assuming it takes two years for the stock to hit this target it represents a compound annual gain of 41.7% each year. With the 6% annual yield, the expected total return is 47.7% annually over two years.
Cheap Stocks to Buy: AT&T (T)
Market Capitalization: $214.03 Billion
Dividend Yield: 6.9%
AT&T is a diversified telecom, media, and technology (TMT) services company with more than $175 billion in revenue in the last 12 months ending June. Right now, the stock is attractive with a 6.94% dividend yield and 9.3 times forward P/E ratio.
Moreover, analysts polled by Yahoo! Finance estimate that AT&T will make $3.19 per share this year and $3.24 per share next year. That said, this is enough earnings power to cover its $2.04 annual dividend per share.
I estimate the stock is worth $34.43 based on its average 6% dividend yield over the past four years. In addition, its historical P/E ratio of 13.8 times implies a stock price of $44.83 per share.
In turn, the average of these two is $39.58 — or 32% above the current price of $30 per share.
So, assuming it takes two years to reach this target price, the average annual compounded return is 14.9% annually. And, combined with the 6.9% dividend yield, the total expected return is 21.8% annually over two years.
Summary of Cheap High Yield Stocks
The table here shows that these five cheap stocks to buy that have an average dividend yield of 6.8% and an average P/E ratio of just 10.7 times. That is very cheap.
Moreover, the average upside of each of these stocks is 83.4%. Even it takes on average 2.4 years, i.e. to the end of 2022 to reach these targets, the average compounded return is 28.6% annually.
So, if you include the 6.8% dividend yield each year, the total expected return will be 35.4% each year. And these are excellent expected returns for most investors.
On the date of publication, Mark R. Hake held a long position in ISBC.