With poor interest rates making it harder than ever to milk income from investment portfolios, millions of investors have turned to dividend stocks to get the payouts they want. Just like any other asset in high demand, buying pressure on dividend stocks has pushed up prices on most dividend-paying stocks precipitously. But if you're willing to look a little harder, you can still find some bargains out there -- although perhaps not in the places you'd first look for them.
The search for a cheaper dividend stock
To scout out remaining bargains among dividend stocks, I decided to look for stocks that met two simple tests: a dividend yield above 3% and a price-to-book ratio below one. Choosing a relatively high yield as one criterion was an obvious choice, as it met my desire to find stocks worthy of income-hungry investors.
But picking price-to-book as a measure of value wasn't as clear-cut a decision. Most investors look first at earnings. But with much of the world undergoing systemic stresses that potentially distort earnings, looking at an alternative valuation measure like book value can reveal some stocks that earnings-focused investors would have dismissed without a second glance.
My screen returned 16 stocks, from which five made my final cut. Let's look at some summary information on each:
|ArcelorMittal (NYSE: MT )||3.2%||0.55|
|Banco Santander (NYSE: STD )||5.9%||0.71|
|CME Group (Nasdaq: CME )||3.2%||0.87|
|Encana (NYSE: ECA )||4%||0.91|
|France Telecom (NYSE: FTE )||9.1%||0.98|
Source: Motley Fool CAPS. As of March 5.
As with any screen, simply buying stocks that pass any test without a further look is asking for trouble. Especially when valuation metrics are involved, you have to remember that low-priced stocks are often low-priced for a very good reason -- one that should scare you out of owning shares.
It's interesting to see how many of these stocks are based in Europe. Fears of a European economic meltdown have kept many stocks at attractive valuations lately, even among businesses that have a reach beyond the Continent. Arguably, for ArcelorMittal, news that China expects to see slower growth going forward will have a more negative impact on the stock than anything that is likely to happen among the weaker European countries. Similarly, Banco Santander has been raising capital by offering stakes in its Latin American units, aptly establishing its ability to meet any liquidity event in Europe effectively.
Even France Telecom doesn't have to worry about sovereign debt as much as many people seem to think. Unless you expect mobile, broadband, and other telecom services to come to a screeching halt in an Armageddon-like scenario, France Telecom is arguably one of the best-situated companies to weather a storm in Europe.
Dealing with controversy
On the other hand, controversial stocks often trade at temporarily low valuations only to rise again once the uproar dies down. For CME Group, its connection with the MF Global scandal has many investors worried about whether the exchange might need to take costly steps of its own to keep confidence in its markets high. But with a huge dividend increase, the company hopes to make shareholders happy the old-fashioned way: with cold, hard cash.
Similarly, Canada's Encana is dealing with one of the most challenging environments for natural gas in years. With a substantial debt load coming due in the next couple of years, its strategy of moving toward higher-priced oil and liquids will challenge the company's survival. Yet any rise in gas prices at all could set the stage for big gains.
Bargain stocks are rarely no-brainer buys. There's always some reason investors are sour on a stock, and until hindsight gives perfect clarity, it can be tough to avoid fear and stay rational. But by keeping your eyes open to opportunities beyond the beaten path, you'll give yourself the best chance for strong returns and healthy payouts for years to come.
We've got some other good dividend stocks for you to take a look at. Let me suggest reading the Motley Fool special report "Secure Your Future With 11 Rock-Solid Dividend Stocks." I invite you to grab a free copy to discover everything you need to know about these 11 generous dividend payers.