3 Beaten-Down Dividend Stocks to Watch, and One to Buy Now

What companies are tomorrow's big winners? In our ongoing series, I'm chatting with Fool analysts and advisors to discover the stocks they're watching, and the catalysts that would signal it's time to buy. Today, Motley Fool Options advisor Jim Gillies shares four companies that he finds undervalued and nearly ready to make the leap to your portfolio from your watchlist. (For your convenience, you can now create your own version at MyWatchlist.com, your free customized hub to follow the performance and Fool coverage of the companies you care about.)

Three banks to consider
Canadian bankers aren't much fun to party with. They live with tighter regulations, and they're much more risk-averse than their neighbors to the south. Pretty dull. But that's just fine for Jim and the conservative, bedrock portion of his portfolio. Today, he's most interested in the big Canadian banks, specifically last year's laggards. The Bank of Nova Scotia (NYSE: BNS  ) is within spitting distance of its 52-week high, but it's a solid, well-run bank that has weathered the financial storm. The Bank of Montreal (NYSE: BMO  ) has also seen its share price rise, but not so much that it's not worth watching. And although Jim refers to Canadian Imperial Bank of Commerce (NYSE: CM  ) as "the bank most likely to walk into a sharp object," he also sees long-term value here.

Although CIBC has a history of getting mixed up with the wrong crowd -- every time a Global Crossing or an Enron or a WorldCom or a subprime debacle pops up, that bank seems to surface among the large investors -- Canadian banks live by the unofficial motto, "Thou shalt not cut thy dividend." They'll sell debt, they'll make preferred offerings, but they're generally not going to touch their payments to shareholders. And now that the credit crisis is abating, Canadian banks look ready to raise their dividends. History shows Jim that those bumps have generally been in the range from 7% to 10% annualized, which equals a whole lot of loonies.

And one monster to buy
There's a little company, says Jim in his storytelling voice, that once upon a time announced disappointing earnings and got whacked nearly 20% over the next week. That "little company" is Cisco Systems (Nasdaq: CSCO  ) , the king of network equipment for big business and government. "I'm amazed that a nine-figure company somehow was able to offend the chattering classes to the tune of 16+% in a single morning on results that frankly weren't that bad."

The company disappointed investors last month by predicting quarterly revenue growth of only 3% to 5%, while its rivals didn't seem to share Cisco's problems. But that doesn't obscure the fact -- at least for rational investors -- that Cisco is still the industry standard in its networking markets, and is making inroads into new areas, including the consumer space, with video tools. Better yet, it'll begin paying a dividend next year.

Jim owned shares of the giant more than a decade ago, and he's now eyeing a "larger" investment thanks to the deep discount the market is providing. He's made a long-term call option play while he does his due diligence. With the expected capital appreciation and a newly minted dividend, "Cisco could well be the meganame for the next leg of the market," says Jim. "We're getting a great name at a big bargain right now."

And that's why it pays to watch. You can make smarter investing decisions with your own version of My Watchlist, new and free from the Fool. Click below to start following one of the stocks mentioned above:

Roger Friedman doesn't own shares of any companies mentioned, but they're all now on his watchlist. Bank of Nova Scotia is a Motley Fool Income Investor pick. The Fool has a bull call spread position on Cisco Systems. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (14)

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  • Report this Comment On December 16, 2010, at 4:11 PM, BradReeseCom wrote:

    Hi Roger,

    You state:

    "The company disappointed investors last month by predicting quarterly revenue growth of only 3% to 5%, while its rivals didn't seem to share Cisco's problems. But that doesn't obscure the fact -- at least for rational investors -- that Cisco is still the industry standard in its networking markets, and is making inroads into new areas, including the consumer space, with video tools."

    Well, on a quarterly sequential basis, Cisco's sales are in decline with the culprits fingered as security, switches and video connected home sales. Perhaps the biggest giveaway that Cisco has lost sequential sales momentum has been the reorganization of its product sales reporting.

    Sequentially, Cisco's total sales declined by -$86 million with new product sales declining the most -$132 million followed by switch sales which declined -$57 million (the 2nd sequential switch sales decline in a row for a total decline of -$110 million).

    Additionally, when breaking down Cisco's new product sequential sales decline of -$132 million, the culprits fingered turned out to be security sales declining by -$131 million followed by video connected home sales which declined by -$95 million (the 3rd sequential video connected home sales decline in a row for a total decline of -$153 million).

    Furthermore, Cisco filed its Form 10-Q (page 35) with the U.S. Securities and Exchange Commission which specifically and very emphatically states:

    "Our consumer market experienced a sales decline on a year-over-year basis for the first quarter of fiscal 2011."

    Finally, Cisco's Q1 FY'11 router sales were down -$95 million from Q1 FY'08 and Cisco's Q1 FY'11 switch sales were down -$80 million from Q1 FY'08.

    Sincerely,

    Brad Reese

  • Report this Comment On December 17, 2010, at 1:02 AM, xetn wrote:

    At least the Canadian banks are in much better shape that the US, and as far as I know, there have not been any failures. If I were to invest in a bank, it would be a Canadian. A second reason (other that the implied safety is the ability to have a multiple currency account. I believe the C$ will slaughter the US $ in the next year.

  • Report this Comment On December 30, 2010, at 12:14 PM, gimponthego wrote:

    Hats off ! I bought a trailer load of CISCO last week after much delving and DD. It is, as you say, one heck of a bargain! I can't imagine any serious, long term investor not buying this classic with so few miles on it...and so many to go.

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