In today’s near-zero interest rate environment, it’s been tough for investors looking for yield. There are many high-yielding dividend stocks to buy, but with markets at all-time highs, many of them have gotten stretched when it comes to valuation.
With concerns 2020’s overvalued stock market will head lower in 2021, it may not be best to dive into this often talked-about names. Instead, consider the many undervalued stocks that not only offer a fantastic forward dividend yield, but also the potential to gain in the coming 12 months.
Granted, if markets overall take a hit, it may be tough for many of these stocks (which remain down due to the novel coronavirus pandemic) to bounce back towards prior price levels. But with the potential for gains outweighing potential losses, all could be great buys as we head into the new year.
Offering value and yield, consider these five undervalued dividend stocks to buy:
- Gilead Sciences (NASDAQ:GILD)
- H&R Block (NYSE:HRB)
- Kraft Heinz (NASDAQ:KHC)
- Lumen Technologies (NYSE:LUMN)
- Altria Group (NYSE:MO)
Dividend Stocks to Buy: Gilead Sciences (GILD)
The rollout of Covid-19 vaccines from Moderna (NASDAQ:MRNA) and Pfizer (NYSE:PFE) has taken the spotlight away from the pharma giant, and its novel coronavirus treatment, remdesivir (to be marketed as Veklury).
That alone hasn’t been why shares have not performed well since the summer. Other concerns, like its aggressive M&A activity, and hiccups with its rheumatoid arthritis drug candidate, have been negative factor the stock as well.
Trading for between $75-$80 per share back in July, GILD stock now changes hands for around $57 per share. But while speculators have moved elsewhere for pandemic plays, it may be time to seize the opportunity.
How so? With its solid 4.8% forward dividend yield, and low valuation (forward price-earnings of 8.7x), Gilead is cheap relative to some of its big pharma rivals. Sure, with analysts expecting essentially zero sales growth between 2020 and 2021, it makes sense the stock commands only a single-digit P/E ratio.
Yet that didn’t stop RBC’s Brian Abrahams from seeing it as a top biopharma pick for 2021. Citing multiple catalysts, the analyst sees the potential for around 50% gains in this hard-hit healthcare play. With yield and upside potential, consider this a dividend stock to buy ahead of the new year.
H&R Block (HRB)
Despite being a major player in a recession-resistant business (tax preparation), HRB stock has remained far below its pre-pandemic prices. Yielding 6.6% and selling at a forward multiple of just 4.7x, why are investors shunning this business?
Chalk it up to growth, or lack thereof. As discussed in its recent investor day presentation, the company is targeting annual growth in the mid-single digits. Given individual tax filers continue to move towards online alternatives, it’s no shock H&R block is stuck in neutral. But the company is fighting to avoid obsolesce.
How? By focusing on small business rather than individual clients. Management may be on to something. As InvestorPlace’s Josh Enomoto discussed Dec. 17, the pandemic-driven shift to remote work could parlay into an increase in independent contractors.
I don’t see this stock becoming a long-term compounder. But with investors expecting the worst, a better-than-expected 2021 could send this cheap stock back to prior price levels (between $20-25 per share, compared to around $15.50 per share). Get paid while you wait with its high dividend yield and consider now the time to buy H&R Block stock.
Kraft Heinz (KHC)
Earlier this year, I called KHC stock a “value trap that could fall further.” But proven wrong by its pandemic tailwinds, shares in the packaged foods giant look good at today’s prices. Even after rallying from under $20 per share, to around $35 per share, since March.
Why do I still see value with Kraft Heinz, even after its 75% rally? With its around 4.6% dividend yield, this is another recession-resistant stock offering an ample payout. Not only that, compared to peers, Kraft is cheap. Sporting a forward P/E of 12.8x, that’s far below what rivals Conagra (NYSE:CAG) and General Mills (NYSE:GIS) currently command.
To top it all off, the company has learned from its past mistakes. Instead of leaning on financial engineering to move the needle, the company now has a solid organic growth plan in motion. The food giant’s management is confident this new strategy will help deliver top line growth. Even as Covid-19 tailwinds for the packaged food industry enter the rearview mirror.
Keep in mind that, with the vaccine progress, investors may take profit with what’s been a pandemic stock since last March. But reasonably priced, and rewarding shareholders via its dividend, consider this another value and yield play for your portfolio.
Lumen Technologies (LUMN)
Lumen may not be a household name. But I’m sure you are familiar with this company’s former name, CenturyLink. As our own Joel Bagole discussed back in October, the company is looking to shed its past (landline and cable), and go all-in on fiber optic solutions.
It’s no shock LUMN stock remains far down from where it was earlier this year, not only due to its strategic pivot still being a work in progress. With its large debt position (around $33 billion), investors may be worried it’s overleveraged.
But upon closer look, risk/return looks good with this value play. Trading at a forward P/E of 6.7, Wall Street has already priced-in much of the worst-case scenario. And, while debt is high, the company continues to be a cash cow. Generating $6.75 billion in operating cash flow in the past 12 months, the company has plenty coming in to both pay down its debt, and pay out its impressive 10.1% dividend.
Given it’s busy streamlining its operations, the big payoff may be years away for LUMN stock. Yet, offering both high yield, and the potential for solid gains, consider this name to keep top of mind as we enter 2021.
Altria Group (MO)
MO stock is one I’ve discussed many times in the past year, both as a value stock and as a dividend stock. But while dividend and value investors may sing its praises, there are plenty that are critical of its long-term prospects.
With Seeking Alpha contributors making bearish calls like “Altria is collapsing,” citing declining smoking rates and a maxed-out payout ratio, many may see this is a value-trap dividend stock, much like Exxon Mobil (NYSE:XOM).
Yes, Altria’s future potential may be much lower than the stock’s historical returns. But there’s still worthwhile upside for those diving in at today’s prices (around $40.25 per share). What do I mean? Far from “collapsing,” earnings are set to grow by mid-single digits in the coming year. Add in potential opportunities in non-combustible tobacco and cannabis. Simply put, there’s a path for shares to head back towards prior price levels ($50-$60 per share).
With a forward yield of 8.3% and the potential for slow and steady gains, this sin stock remains a great dividend value play.
On the date of publication, Thomas Niel held long positions in LUMN and MO stock.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.