5 Value Stocks, Most With Dividends, That Are Still Cheap

The stock market has been on a tear lately, rising by over 20% since the beginning of October. That's cause for being happy, right?

Not if you're Warren Buffett. As he said in his latest letter to shareholders, "If you are going to be a net buyer of stocks in the future … you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter."

In other words, if you're less than three years away from retirement, this is good news. If you're like the rest of us and still have a long way to go -- and this goes against every ounce of intuition in our bodies -- we'd actually benefit from a prolonged market downturn.

But of course no one can predict if the market will go up or down. Sticking to a regular investing schedule is probably the best plan. And if the market's tear has left you thinking that there are no deals left to be had, I encourage you to check out the five options below. At the end, I'll also offer you access to a special free report on the obscure stocks only the smart investors are buying now.

  P/E PEG ratio Dividend Yield Payout Ratio
Goodyear Tire (NYSE: GT  )  9.8 0.17 -- --
Valero (NYSE: VLO  )  7.7 0.63 2.2% 8%
Caterpillar (NYSE: CAT  )  15.0 0.44 1.7% 24%
Johnson Controls (NYSE: JCI  )  13.4 0.61 2.3% 27%
Cummins (NYSE: CMI  )  12.7 0.70 1.4% 14%

Source: Yahoo! Finance.

Goodyear Tire
Goodyear is actually in a very interesting position. When the economy is strong, sales are good -- but the price of rubber is usually so high that earnings get cramped. On the other hand, though sales slump during economic downturns, the price of rubber usually drops enough to boost margins to the point that the company is more profitable. For the past two years, the company has spent more on capital expenditures than it has gotten in cash flow from operations. I think Goodyear is actually a particularly promising idea if you believe we might be headed for tough economic times.

Valero
This oil company is the largest independent refiner in the United States, but also operates fueling stations to diversify its revenue streams. The company recently bested analyst expectations, but the market is still dour on its operating losses because of cramped margins. That said, it looks like those margins are opening up again, and there's still lots of room for it to beef up its dividend.

Caterpillar
A play on Caterpillar is really a play on a global economic recovery. As businesses begin developing land and making improvements again, Caterpillar's products will once again be in demand -- especially in Asia's emerging economies. Last quarter, mining in emerging markets accounted for the bulk of the company's impressive performance. And as with Valero, the company's low 24% payout ratio means that there's lots of room for its dividend to grow.

Johnson Controls
A much smaller play than the above-mentioned companies, Johnson Controls basically specializes in auto parts. The company has also gained attention recently for its manufacturing of lithium-ion batteries for hybrid cars. While some are worried about short-term concerns with Europe, I think the company's position and solid history as a dividend payer with 36 consecutive years of dividend increases make it a buy at today's prices.

Cummins
Finally we have Cummins, the maker of truck engines. The company already differentiates itself by partnering with Westport Innovations to offer engines that run solely on natural gas. If the movement takes off, it'll be a huge boon, but even if it doesn't, at today's prices the company looks like a solid buy. And as an added bonus, there's still lots of room for dividend growth.

Go where no one else is looking
I'll be backing these picks with a thumbs-up for all five of these companies on my All-Star Profile.

If these five options have whetted your appetite for value stocks that are underappreciated, I suggest you check out our latest special report, "The Stocks Only The Smartest Investors Are Buying." Find out the names of these companies by getting your copy of the report today, absolutely free!

Fool contributor Brian Stoffel does not own shares of any companies mentioned. You can follow him on Twitter, where he goes by TMFStoffel.

Motley Fool newsletter services have recommended buying shares of Cummins. 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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