6 Cheap Stocks That Keep Paying You Back

Got dividends? If not, this might be a really good time to get some.

A stock with a good, solid dividend is a beautiful thing. It's an especially beautiful thing during times of market turmoil. Why? Because when you own stocks with sustainable dividends, you know you'll be making money whether the market is up or down at any given moment.

In fact, assuming you're reinvesting the dividends -- using them to automatically buy more of the stock, rather than receiving them in cash -- market dips mean you get even more shares for your money. Over time, the power of reinvested dividends can match -- or even outperform -- returns from growth stocks, with way more stability and predictability. And unlike growth stocks, the best dividend stocks can keep generating outsized returns for decades.

A good stock, not just a good dividend
A high, sustainable dividend is a great thing. But finding one coupled to a value price is even better, especially when the market is being unpredictable. While stock prices can seemingly go anywhere over the short term, a good stock bought at a value price -- a price lower than its intrinsic value -- has less downside risk over the long term. That usually translates to more stability during times of market turmoil.

Mmore to the point, value stocks are by definition good buys -- stocks where you can expect some solid appreciation over time. Now, factor in a high, sustainable dividend -- at a great price that leaves room for appreciation? That's a great thing.

How to find the great ones
I like the stock screener on Motley Fool CAPS for a lot of reasons; for one thing, the star ratings serve as a quick-and-dirty proxy for the quality of a company as an investment. For these purposes, if you set the CAPS screener to filter out companies that have fewer than 50 or so ratings, and to show only four- or five-star-rated stocks with dividend yields of 4% or more and P/E ratios of 15 or less, you'll have a list composed entirely of prime dividend-stock value candidates. They're not sure things by any means, especially since P/E isn't the greatest measure of value nowadays, but most of the scary ones will get left behind.

I also like to weed out companies with other problem signs. For instance, because high debt can be a sign of trouble looming, I look for a long-term debt-to-equity ratio of 0.8 or less. I also like companies whose return on equity -- a quick indicator of management's effectiveness -- is 15% or higher.

Do all that, and you'll get a list that looks a lot like this:

Company

CAPS Rating
(out of 5)

P/E Ratio

LT Debt-to-Equity Ratio

Return on Equity

Dividend Yield

Linn Energy (Nasdaq: LINE  )

*****

4.6

0.72

27.2%

9.5%

Olin (NYSE: OLN  )

*****

10.1

0.48

19.4%

4.6%

Partner Communications (Nasdaq: PTNR  )

*****

12.2

0.57

50.8%

6.6%

Sasol (NYSE: SSL  )

*****

12.2

0.16

16.3%

4.5%

Turkcell (NYSE: TKC  )

*****

10.7

0.10

20.3%

5.2%

AstraZeneca

****

8.3

0.54

37.2%

7.9%

Source: Motley Fool CAPS. LT = long-term.

If you do a bunch of these kinds of screens, you will find that certain types of companies tend to show up more often than others. Big pharmaceutical firms, for instance, often have fairly stable cash flows and fat dividends, which make them intriguing candidates for this sort of purchase.

I listed AstraZeneca above -- a 7.9% dividend yield is hard to resist -- but Eli Lilly (NYSE: LLY  ) and Merck (NYSE: MRK  ) also showed up in the same screen. They're also four-star-rated stocks with low P/Es, good dividends, and other appealing features. Any of them would be a good choice for further research.

Of course, the ratings are the consensus opinion of an informed community, but they aren't by themselves reason enough to buy. A careful look at the underlying business and the company's industry are musts before making the trade. You want to make sure the stock's not "on sale" for a bad reason! But a screen like this gives you a huge head start on your due diligence.

If you'd like to backstop your own research and check out some great dividend generators to buy today, help yourself to a free trial of our Motley Fool Income Investor service. Three of the stocks I mentioned are on its recommendation list -- and you can see all the others free for 30 days with a no-obligation trial.

John isn't the only dividend-loving Fool. Check out Selena Maranjian's big fat dividends.

Fool contributor John Rosevear has no position in the companies mentioned. Sasol and Turkcell are Motley Fool Global Gains recommendations. Partner Communications, Sasol, and Turkcell are Motley Fool Income Investor picks. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 26, 2010, at 7:47 PM, rickalaskan wrote:

    Not sure exactly how you guys are coming up with that dividend % for AZN?

    Sounds like a little inflated to me. They seem to pay a large dividend once a year in Feb and a much smaller dividend later on in the year. My calculations do not add up to the 7.9% you have listed. What is the real dividend rate?

  • Report this Comment On February 27, 2010, at 6:14 AM, route66driver wrote:

    AFAIK the dividend yield of AZN is around 5.3%

    Taken from http://www.topyields.nl/Top-250-dividend-yields-5.php

  • Report this Comment On February 27, 2010, at 7:15 AM, TMFMarlowe wrote:

    These numbers are right out of the automated screener, as I said in the article, but looking now... it looks like a number of data sources are using a "projected yield" number for AZN instead of a trailing 12 months figure. It looks like the company's dividend practice has been a big payment in Feb and a smaller one in August for at least the last couple of years, but the feeds seem to be just doubling the recent big number.

    I calculate the TTM number at 5.2% -- $1.71 on 2/3/10 and $0.59 on 8/5/09. Is that what you get? If I double the $1.71 and divide by the share price I get 7.8%... yep, that must be what the feeds are doing.

    5.2% is still a fine yield, but that's actually an excellent example of why some in-depth research on these things is a must before buying. Thanks for pointing it out.

    John Rosevear

  • Report this Comment On February 27, 2010, at 12:54 PM, rickalaskan wrote:

    That sounds like what I get. As Ronald Reagan once said, "Trust but verify".

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1122781, ~/Articles/ArticleHandler.aspx, 9/18/2014 4:00:49 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement