With the market making new all-time highs, it’s getting harder every day to find quality bargain dividend stocks that also make decent-to-generous cash payouts — but they do exist.
Consider this: The S&P 500 is up 23% in 2013, helped by near-record corporate earnings per share and, of course, multiple expansion. The trailing price-to-earnings ratio of the S&P has risen to 18.7, which is well above its long-term average. Meanwhile, the forward P/E of 14.8 matches the long-term average — not expensive, but not cheap.
Other measures suggest stocks are even more overvalued.
Higher share prices also reduce the yield on dividends, which is not a good thing for income investors (with new money to spend) in this world of ultra-low interest rates. The dividend yield on the S&P is back below 2% after topping 2.1% a year ago. Yields in the Dow Jones Industrial Average have thinned even more, to 2.2% from 2.7% a year ago.
And yet … it is possible to find quality names sporting competitive to crazy dividends that still look like they’re on sale.
Here are three of the best dividend stocks you can buy for a song:
International Paper
Dividend: 3.2%
Forward P/E: 10.2
ROE: 15.2%
No one is going to mistake International Paper (IP) for a hot growth stock — shares are up just 10% year-to-date — but it does have plenty of attractive attributes for income investors.
It’s a quality name with a return on equity of more than 15% and shares are cheap, too. The forward P/E represents a 31% discount to the S&P 500 — a steal considering the long-term growth forecast averages more than 15% a year for the next five years or so.
And despite what you might think about the death of paper in a digital age, IP still has seen enough demand to fuel several years of revenue increases, including an 8% improvement in 2012.
High-quality dividend stocks that are on sale and have a respectable yield north of 3% always have a place in an equity income portfolio.
Freeport-McMoRan Copper & Gold
Dividend: 3.4%
Forward P/E: 11
ROE: 15%
Collapsing prices for precious and industrial metals have been most unkind to Freeport-McMoRan Copper & Gold (FCX), as shares are up just 6.4% so far this year.
On the upside, FCX’s underperformance has made a quality stock look cheap. The forward P/E offers a 25% discount to the broader market, despite having a stronger growth rate. Analysts forecast FCX to post annual average earnings growth of 11%, while the S&P 500 is seen clipping along at just 9.8%.
Throw in a return on equity of more than 15% and a dividend yield of 3.4%, and you’ve got another cheap, high-quality name suitable for income now — and price appreciation later when commodities turn up, too.
SeaDrill
Dividend: 7.9%
Forward P/E: 12.5
ROE: 33%
SeaDrill (SDRL) absolutely knocks it out of the park with its 7.9% dividend, but this Norwegian oil and gas driller has other things going for it as well.
Shares are up 25% for the year-to-date, outpacing the broader market by about a percentage point. That’s despite oil prices going nowhere to down, as well as Q3 results being hit by a recent settlement.
The forward P/E is almost 16% cheaper than the S&P 500, but SDRL has a long-term growth rate of more than 27%. That alone makes it a bargain. An ROE of 33% only adds to the allure of this cheap, high-quality stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
