Cheap Dividend Stocks

Barron's feature article this week is on the top 1,000 investment advisors in the U.S. I thought the most interesting line in the report was in the subtitle: "Their single biggest recommendation: Buy dividend stocks."

My Foolish colleague Morgan Housel recently made a convincing case that valuations in the dividend-stock universe are getting rich as investors reach for yield. Dividend stocks are popular here at the Fool and I'm both a fan and a cheerleader. But it's concerning as a contrarian for me to see any investing approach getting popular.

With dividend-stock prices bid up, are there still good bargains out there? A screen should help answer that question. I wanted to find out if there are still stocks trading at a discount to the market, but with above-market dividend yields and solid balance sheets. To get the answer, CAPS screener was run with the following parameters:

  • Price-to-Earnings ratio positive and under 15
  • Dividend yield above 2.5%
  • Long term debt-to-equity ratio less than 1.0
  • Revenue and earnings growth rate both over 5% for the last three years
  • Market capitalization greater than $250 million
  • CAPS rating of four or five stars (out of five)

The screen kicked out 33 stocks covering a variety of sectors, including these five:

Company Name

Sector

Price-to-Earnings (TTM)

Dividend Yield

CAPS Rating

Statoil (NYSE: STO  ) Basic Materials 6.5 3.5% *****
3M (NYSE: MMM  ) Conglomerates 14.7 2.7% *****
Aflac (NYSE: AFL  ) Financial 11.5 2.7% *****
Walgreens (NYSE: WAG  ) Services 11.8 2.6% ****
Intel (Nasdaq: INTC  ) Technology 11.5 3.1% *****
S&P 500 Index   15.65 2.1%  

Source: CAPS Screener results. S&P 500 valuation from Barron's Market Lab.

Statoil is a Norwegian oil and gas exploration and production company. Analysts expect about a 7.5% long-term growth rate. I normally like to do a little more research before making a CAPScall, but Statoil's cheap, pays a nice annual dividend, and recently bumped up production, so it gets a green thumbs-up on my scorecard.

Tape, adhesives, filters and a plethora of other products summarize 3M's business. Analysts put their long-term earnings growth at 10%.

Cue the duck. Aflac represents financials on the list and, as you probably know, is in the insurance business. Above market yield, discount valuation and analyst expectations for 10% growth should put it on dividend investors' "dig deeper" list. Like with Statoil, I'm making an outperform CAPScall on Aflac.

Steady performance, stable business, and a reliable dividend earn drug-store chain Walgreens a place on the list. Walgreens also joins 3M and Aflac on S&P's Dividend Achievers -- an exclusive list of companies with at least a 25-year history of annual dividend hikes.

Cheap valuation, nice dividend, and double-digit growth expectations are the core reasons I own shares and have a long-standing CAPScall on Intel. The company is late to the mobile-device market, but the PC business isn't quite dead yet and Intel has the resources to compute a catch-up path.

The screen shows there are still some decent values among dividend-payers in the market. They just aren't as good a deal as they were six months ago. As always, screen results should be used as a starting point for further research, not as outright buy recommendations.

What's your call? Have dividend stocks gotten too expensive? What's your favorite? Weigh in with a comment below.

Fool contributor Russ Krull collects dividends from Intel, but not from any other stock mentioned. The Motley Fool owns shares of Intel and AFLAC. Motley Fool newsletter services have recommended buying shares of AFLAC, 3M, Intel, and Statoil A and creating a diagonal call position in 3M. Try any of our Foolish newsletter services free for 30 days. 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.


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