Source: TaxCredits.net via Flickr.
Dividend stocks are the cornerstone of many well-run retirement portfolios -- that's a fact. The reason is that dividend stocks act as a beacon to investors, inviting them to take a deeper look into a company whose business model is so sound it can pay out a percentage of its annual profits on a regular basis to its investors.
Even more so, dividends can provide a downside hedge in volatile and bear markets. Investors in dividend stocks tend to be more long-term oriented, which usually means far less day-trading and less volatility.
Lastly, dividends can be reinvested, giving the buyer a chance to really compound gains over the long run. These payouts can mean the difference between simply retiring and retiring the way you've always dreamed.
With that in mind, let's have a look at three cheap dividend stocks you can consider buying right now.
1. Apple (AAPL -0.81%)
Sure, technology giant Apple has gained around $175 billion in market value this year and is currently the world's most valuable company, but that doesn't mean it can't head even higher next year.
In spite of its soaring share price Apple is still valued at a mere 13 times forward earnings and it has its innovative capacity to thank for it. This year saw the emergence of three firsts from Apple.
First, Apple introduced the iPhone 6 and iPhone 6 Plus, a larger version aimed directly at competing with the larger Galaxy smartphone from Samsung. Early indications suggest consumers like the new option as iPhone 6 sales set a record by topping 10 million during their first weekend post-launch. Globally Google's Android operating system still dominates, but when you consider that the iOS runs just on iPhones and Android across a bevy of brands and models, the 12.3% of global OS market share Apple has captured is very impressive.
Source: Apple.
Secondly, the company unveiled Apple Pay, which has the opportunity to revolutionize near-field communication payments and finally get the technology off the ground. It also may represent a big improvement over current credit card security measures.
Lastly, Apple unveiled the iWatch in order to attract a younger generation of tech-savvy consumers that are eager to own the latest in wearable technology.
With Apple's innovation demise largely overstated investors can instead focus on the nearly $50 billion in free cash flow it brought in last year, or the $11 billion it's currently paying out in dividends to shareholders each year. Considering that Apple has implemented substantial dividend increases twice since it started paying a dividend in 2012, I'd suggest this 1.7% yield is likely to move higher once again in 2015. In my book, Apple is a cheap dividend stock.
2. Annaly Capital Management (NLY 0.96%)
It's no secret: Wall Street very much dislikes the mortgage real estate investment trust, or mREIT, sector. For example, Annaly Capital Management has lost nearly 40% of its market value over the trailing four years while shareholders have witnessed their quarterly payout cut on eight separate occasions over that same time span.
"What's ailing mREITs?" you ask? Shrinking net interest spreads are the primary culprit, although the prospect of the Federal Reserve raising interest rates doesn't help, either. Annaly and the mREIT sector make their biggest profits when lending rates are falling or at their lows. With rates readying to rise again Annaly and the sector have had to take a safer approach with their asset portfolios (usually made up of mortgage-backed securities).
However, Annaly is part of a select group of mREITs known as agency-only mREITs. It's a fancy way of saying that Annaly only buys MBSs that are backed by the government. The trade-off with purchasing only agency-backed assets is they produce lower yields, but they're backed by the government in case of default. In other words, by being picky about what it buys Annaly can use leverage to its advantage and pump up its profits with the understanding that it's covered in case of mortgage defaults.
NLY Dividend Yield (TTM) data by YCharts
Another consideration to take into account is that even during periods of relatively high lending rates over the past decade Annaly still returned close to 4% a year to investors. Annaly has averaged close to a 10% yield over the past 15 years, meaning reinvested dividends could double your money in less than seven years even if its stock price remains unchanged.
Valued at just 88% of its book value and nine times next year's profit projections from Wall Street, I'd suggest Annaly could be a nice pickup for investors seeking a cheap dividend stock.
3. Coach (TPR -0.91%)
Finally, I'd implore you to take a closer look at handbag and accessories retailer Coach.
There's no sugarcoating the fact that it's been an ugly year for Coach. The company has lost more than a third of its market value following a string of disappointing earnings reports that signal declining sales and increasing pressure from competitors in North American markets. In the third quarter, for instance, Coach's sales fell 9% in constant currency and the company admitted that its strategy would take some time to implement.
But, there's one admirable thing Coach is doing right now that's going to preserve its brand over the long term and put it and shareholders in a position to succeed: it reduced its promotional events. By standing firm against consumers who want a discount, Coach builds up the value and uniqueness of its brand instead of cheapening it. This only adds to Coach's pricing power and should allow it to deliver more impressive margins than many of its peers.
Coach should also continue to find strength in Asia where economic growth is outpacing most regions. For example, sales in China improved by 10% in Q3 from the year-ago period. By focusing on Asia and a rebounding Europe, Coach should be able to offset sales stagnation in North America where it's attempting to turnaround its business.
Boasting a current yield of 4% and $737 million in net cash, Coach is definitely a cheap dividend stock you'll want on your radar.
