In the eight decades prior to 2010, dividends accounted for a whopping 44% of the total return of the stock market. The opportunity to invest in a cheap stock that pays a consistent dividend is an ideal investment scenario, that implies there is an opportunity of share appreciation. This article pulls together some dividend payers that are attractive on a yield basis and on a valuation basis.
All of these stocks pay a dividend yielding at least 3%, while maintaining a payout ratio less than 60%. By having a payout ratio that is less than 60%, we take comfort in the fact that these stocks can continue to pay their dividends during a tough economic environment. From a valuation standpoint, all of our dividend payers have a PEG less than 2.0, suggesting they are ‘growth at a reasonable price’ opportunities.
The first stock on our list is Cisco Systems, Inc. (NASDAQ:CSCO). Cisco has a 3.0% dividend yield that is only a 37% payout. Cisco’s 1.1 PEG and 12x P/E makes it an attractive value opportunity, especially given the company's expected 6% revenue growth in 2013 and 7% in 2014. The key driver for this growth forecast is the steady increase in bandwidth usage. Last quarter, Cisco grew its bottom line by double digits, with service revenues up 12% year over year, continuing to outpace lower margin product revenue, up only 4%. Cisco is also a top ten tech stock loved by hedge funds.
Dell Inc. (NASDAQ:DELL) is the cheapest stock of our five with a PEG ratio of 0.8. After being down 35% year to date on PC concerns - as tablets and smartphones infringe on the PC market - Dell is still a top dividend stock. With a yield of 3.6% and a sub 20% payout ratio, Dell has held up the best compared to its major peer HP. Helping limit Dell’s downside is its strong sales of servers, along with networking services; both will be crucial toward longer-term growth and margin expansion for the tech company.
General Dynamics Corporation (NYSE:GD), the defense contractor, pays a dividend yielding 3.1% and a payout of 30%. General Dynamics is expected to hold up relatively well despite expected defense cuts given strong business jet growth. General Dynamics trades in line on an industry basis, but has solid growth prospects that put its PEG at 1.3. Future growth is expected to come from continued upgrades of defense equipment on an international basis and a surge in the Middle East arms race. General Dynamics is a high-yielder from Warren Buffett’s portfolio.
McDonald’s Corporation (NYSE:MCD) is an international fast food company that is one of the best dividend stocks around. Having grown dividends by 20% over the last five years, its current dividend yield is 3.5%. The stock's payout ratio (58%) and PEG ratio (1.7) are the highest of our five companies listed here, but we are encouraged by the fast food merchandiser’s ability to perform well regardless of the economic setting. At a P/E of 16x, McDonald’s trades well below its major peers Yum Brands (22x) and Jack in the Box (19x). Bill Gates also loves McDonald’s.
Norfolk Southern Corp. (NYSE:NSC) has a sub 1.0 PEG ratio, coupled with the fact that its shares sport a 10.5x P/E -which is the lowest of the five major railroad stocks - making it a very intriguing value play. To boot, Norfolk pays a dividend yielding 3.5% that is only 36% of its earnings. While the S&P 500 is up over 10% year to date, Norfolk is down over 20% on declining coal consumption. As natural gas prices plummeted, many energy providers switched from coal to natural gas as their primary power source. Norfolk has been mitigating the coal decline by taking market share from trucking companies, and seeing boosts in other markets, such as autos and petroleum.
We believe that all five of our cheap dividend stocks have seen downward pressure that is causing investors to over-discount. Cisco is a large tech company that is trying to compete with various smaller, more nimble, competitors; we see these concerns as largely overblown. Dell has seen pressure on PC concerns, but the tech company’s strong product mix is helping the company perform relatively well. General Dynamics was pushed down on defense spending cuts, but we see growth in other areas, and McDonald’s has seen pressure on a slowing Chinese economy. McDonald’s operates across various countries and has introduced an expanded menu to help mitigate China’s slowdown. As energy companies traded coal for natural gas, Norfolk felt the impact, but with rising natural gas prices an expected reversion back to coal should bode well for Norfolk.