Few stock strategies have a better track record of success than dividend investing. That’s because companies that pay dividends are typically businesses that are themselves successful and profitable. The evidence shows that dividend stocks can withstand the vagaries of stock market cycles and outperform those companies that don’t pay a dividend.
Hartford Financial Services (NYSE:HIG) analysts found that since 1930 there has not been a single decade where dividend stocks lost money. Even when the broader market was losing money for investors, income stocks produced positive returns.
Dividend Aristocrats are S&P 500 stocks that have raised their dividend every year for at least 25 years. They tend to offer higher yields than the average index stock (2.5% vs. 1.8%) and at lower risk. Moreover, they outperform the index 70% of the time in months when the S&P 500 declines.
The following three Dividend Aristocrats are undervalued and worth adding to your portfolio in July.
Cardinal Health (CAH)
Drug and laboratory products supplier Cardinal Health (NYSE:CAH) is a modern-day seller of shovels and pickaxes to gold miners. Just as occurred in the Gold Rush, those who provided the tools to the miners came out on top regardless of whether gold was found or not.
Cardinal Health is the same. Because it’s not reliant upon any one product and doesn’t need to discover the next blockbuster drug, it thrives across time. It sells to all the companies that are mining for the next big thing.
Cardinal serves nearly 90% of U.S. hospitals, over 60,000 U.S. pharmacies, and more than 10,000 specialty physician offices and clinics. Some 3.4 million patients use over 46,000 home healthcare products sold by Cardinal. Sales have grown at less than 7% annually over the past five years, but are forecast to grow more than 15% a year for the next five years.
The drug and lab products company paid its first dividend in 1983. It has increased the payout for 37 years. The dividend currently yields 2.1% annually. That’s a nice bonus for investors who can get into the dividend growth stock today at just 14 times next year’s earnings estimates, a fraction of its sales, and less than six times the free cash flow it produces.
Franklin Resources (BEN)
As the operator of the Franklin Templeton family of funds, Franklin Resources (NYSE: BEN), had about $1.4 trillion assets under management (AUM) at the end of its fiscal second quarter. That reflects $8 billion in total net outflows in the period though AUM is still up year to date as the market bounced back.
Franklin Resources is trying to change its reliance upon investment management fees, which make up the bulk of its revenues. That makes it highly susceptible to market fluctuations, but it is steadily diversifying its asset base to accelerate growth. For example, it recently agreed to acquire Putnam Investments for $925 million, the retirement asset business of Power Corporation of Canada (OTCMKTS:PWCDF). It will boost Franklin’s defined contribution AUM to about $90 billion.
Previously Franklin acquired one of Europe’s biggest credit and private debt managers, Alcentra. It also acquired Lexington Partners, a global alternative investment manager to bolster its existing capabilities in real estate, private credit and hedge fund strategies.
Franklin Resources raised its dividend to $0.30 per share last year. It gives the asset manager an unbroken 42-year history of increasing its payout. The dividend yields a juicy 4.5% annually.
With an adjusted earnings payout ratio of around 50%, Franklin Resources dividend is relatively safe. At just 10 times next year’s earnings estimates and an enterprise value-to-EBITDA of 11, this asset manager is also an undervalued dividend stock.
Archer-Daniels Midland (ADM)
Archer-Daniels Midland (NYSE:ADM) is an agricultural products processor that benefited from skyrocketing commodity costs. In 2022, it turned in record earnings of $7.85 per share. As pricing has settled, however, ADM’s stock has sunk. Shares are down a striking 20% year to date.
Yet the stock also goes for nine times trailing earnings, a level not seen for over a decade. At 10 times next year’s estimates and just a fraction of its sales, this stock is undervalued. The market seems to have thrown the baby out with the bathwater.
While pricing might be momentarily weak, people need to eat, so there will be no shortage of demand for food. There is also a heightened need for animal feed and biofuels, particularly as demand for renewable biodiesel increases. The ongoing war in Ukraine is also keeping wheat prices high.
Archer-Daniels Midland is not only a Dividend Aristocrat, but a Dividend King, with a 50-year record of raising its payout. The dividend yields a healthy 2.4% annually. With a payout ratio of just 22.5%, the ag products processor’s dividend is safe and has plenty of room for future growth, too. Mark this undervalued dividend growth stock as one you’ll want to plant in your own portfolio.
On the date of publication, Rich Duprey held a LONG position in CAH and BEN stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
