As the market continues its remarkable rally in June, some investors might suppose that opportunities for substantial gains have diminished. Generally, I would agree. That said, the truth is that many names across various industries remain undervalued. Some, in fact, are high-yield dividend stocks with the potential for significant price appreciation.
In this article, we will explore three high-yield dividend stocks that offer yields exceeding 6% while trading at rather discounted valuation multiples relative to their earnings growth potential. More specifically, I believe that these three names have an upside potential of at least 20% from their current share price levels. In the interim, their hefty dividend yields and already depressed valuations offer a considerable margin of safety against a potential market downturn.
Universal Corporation (UVV)
Universal Corporation (NYSE:UVV) is a company that most investors are not familiar with. Yet, I believe it perfectly fits the criteria we seek. For context, despite its rather small size, Universal is a leading global leaf tobacco supplier currently valued at $1.2 billion.
The company sells its leaves to industry behemoths such as Altria (NYSE:MO) and British American Tobacco (NYSE:BTI). Its well-established relationships with such tobacco majors ensure consistent cash flows, which is further supported by the fact that the tobacco industry itself is rather recession-proof.
In recent years, Universal has diversified its operations while maintaining its robust core business in the tobacco industry. This includes ventures into plant-based ingredients and food products, improving the company’s growth prospects, given that the tobacco industry is facing organic headwinds (i.e., the declining population of smokers). In the meantime, however, the core tobacco segment remains a reliable cash cow.
Today, Universal offers a hefty dividend yield of 6.9%, underpinned by its legendary 54-year track record of uninterrupted dividend increases. Moreover, its recent investments in other areas have fueled accelerated earnings growth. Along with shares now trading at a modest P/E ratio of about 10X, I believe that the current price undervalues the company by at least 20%.
Enterprise Products Partners L.P. (EPD)
The second undervalued, high-yield stock on my list is Enterprise Products Partners L.P. (NYSE:EPD). The midstream energy partnership, known for its extensive network of pipelines, has consistently distinguished itself among its sector peers, driving exceptional earnings and dividend growth over the years. Chances to buy the stock at an attractive valuation are rare, making the current discounted price a compelling opportunity.
To expand on this point, the partnership is now trading at a forward EV/EBITDA multiple of only 9.3X. This marks one of the lowest valuations EPD has seen in its 26-year history as a publicly traded entity. In fact, historically, EPD has averaged a mid-teens EV/EBITDA multiple. Now, combining that with the current highly volatile geopolitical terrain, which could lead to an improvement in the outlook for energy stocks, I believe that EPD stock has an upside potential of at least 20%.
Moreover, the partnership is now attached to a generous 7.2% dividend yield. Individually, this yield is quite impressive. Yet, it’s when you contextualize it alongside the partnership’s track record that you can truly see why purchasing the stock at such a hefty yield makes for a significant opportunity. Specifically, EPD has increased its dividend for 25 consecutive years, proving its ability and commitment to creating shareholder value and returning capital over time.
Atlantica Sustainable Infrastructure (AY)
Wrapping up my list of undervalued, high-yield dividend stocks is Atlantica Sustainable Infrastructure (NYSE:AY). The U.K.-based renewable energy project owner has not managed to gather growing investor interest during the ongoing market rally. Its shares remain at rather depressed levels despite its numerous attractive characteristics. Thus, this top-tier operator continues to trade with a rich dividend yield of about 8.1% and the potential for substantial upside, which I believe exceeds 20%.
With Atlantica’s high yields and depressed share levels, you might question whether Atlantica’s dividend is at risk. Yet, this should hardly be the case. Atlantica owns a diversified portfolio supported by Power Purchase Agreements (PPAs) featuring an average weighted life of 13 years. These contracts with credible off-takers ensure a highly predictable revenue stream. Atlantica has increased its dividend annually since 2014, highlighting the benefits of its strong cash flow visibility.
When valuing Atlantica, it’s crucial to understand the most accurate approach. Valuing the stock based on earnings can give misleading results due to the company posting significant depreciation and amortization amounts. Instead, it’s better to focus on Cash Available for Distribution per Share (CAFD/share), which came in at $2.03 last year. I expect similar levels in FY2024, implying a P/CAFD of 10.8x. Given the company’s overall qualities, I believe this multiple undervalues the stock.
On the date of publication, Nikolaos Sismanis did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
