The dividend stock universe is an extremely diverse space that holds numerous hidden gems. Unfortunately, it can be rather time-consuming and laborious to try to unearth under-the-radar stocks that pay juicy yields and are sustainable for the long term.
We asked three of our contributors which dividend stocks they think investors may not be paying enough attention to right now. They suggested Gilead Sciences (NASDAQ:GILD), Universal Corp. (NYSE:UVV), and Mobile TeleSystems (NYSE:MBT). Read on to find out why these three dividend stocks might be worth adding to your portfolio.
This biotech titan is all grown up
George Budwell (Gilead Sciences): Gilead Sciences began paying a dividend in the second quarter of 2015. Even so, this biotech giant is rarely considered for its fairly rich yield of 3.15% and is instead generally thought of as a growth stock. The facts on the ground, though, suggest that Gilead is probably better viewed as a mature income-generating stock at this stage in its life-cycle, rather than the high-flying growth vehicle that characterized its youth.
In fact, Gilead is a top-notch dividend stock based upon several metrics. First off, this biotech's yield is markedly higher than the current average among healthcare stocks of 2.28%, and it is comparable to the prevailing average within its biopharma peer group of 3.4%.
Next up, Gilead has enormous free cash flows and an outstanding 12-month trailing payout ratio of 20% as a result. In the most recent quarter, for example, Gilead's top line dropped by a noteworthy 16.5% compared to a year ago, but the company still generated almost $3 billion in free cash flows during the quarter. The point is that Gilead's dividend is not only sustainable but has the potential to grow by leaps and bounds in the years ahead.
Having said that, there is one notable red flag concerning Gilead's dividend program that's worth keeping in mind. Because of the shifting dynamics within the hepatitis C drug market, Gilead has a clear need to shore up its top line via an acquisition soon, and that may put a damper on further increases to its payout in the near term.
Even in the event of a major acquisition, though, Gilead's dividend should be safe from a reduction or a suspension. The company, after all, has over $34 billion in cash, and the more likely scenario would be a pullback in its far more costly share repurchase program.
So while Gilead is a fairly recent addition to the dividend stock universe, it certainly has the ingredients necessary to be a top income-generating equity moving forward.
A little-known name in a profitable industry
Dan Caplinger (Universal Corp.): Some stocks have names that tell you absolutely nothing about what they do, and Universal Corp. is just about the most generic name you could come up with. But the company does business in the lucrative tobacco industry, engaging in all stages of the procurement, production, and distribution process of getting leaf tobacco from farms to final manufacturers. From cigarettes and cigars to pipe tobacco and smokeless tobacco products, many companies rely on the Virginia-based supplier as their source of raw materials.
Tobacco-related stocks have been highly profitable over time, and most of them reward their shareholders with high dividends. Universal is no exception, currently boasting a 3% dividend yield. More importantly, Universal has put together an impressive track record of dividend growth over its history, having increased its dividend for 46 straight years, most recently with a 2% increase to $0.54 per share in January.
Most importantly, Universal isn't standing still. With the threat of falling tobacco demand, Universal has jumped into value-added services, including testing of increasingly popular e-cigarette and e-liquid products. As alternatives to tobacco evolve, Universal is working hard to make sure that it remains a relevant part of the industry, and dividend investors have reaped the rewards for decades now.
From Russia with dividends
Rich Smith (Mobile TeleSystems): Everyone knows that phone stocks are a good place to find big dividends. The two biggest phone stocks in the U.S., AT&T (NYSE: T) and Verizon (NYSE: VZ), both pay dividend yields of 5%. At P/E ratios of 19 and 15, respectively, those stocks aren't terribly expensive, either. But what if I told you that there's another telecom stock out there -- maybe a little bit farther from home than you're accustomed to looking -- that pays a dividend nearly twice as big as what AT&T and Verizon shell out, and that sells for a P/E ratio far below what AT&T and Verizon cost?
Its name is Mobile TeleSystems, and while listed on the NYSE, it's actually the biggest telephone company...in Russia.
I know. Scary, right? Big, bad Russia, home of Vladimir Putin, bears roaming wild in the streets, and perpetual, year-round snowstorms. But in fact, Russia's bad reputation, and the fact that many investors won't even consider investing there, make it an intriguing place to look for value-priced stocks paying big dividends. (Also, the forecast for this weekend is partly sunny with a high of 70 degrees.)
Mobile TeleSystems (or MTS, as it's more commonly known in-country) seems to me a good place to start looking for such bargains. According to data from S&P Global Market Intelligence, MTS earned more than $850 million in profits last year, and at a market capitalization of barely $9 billion, sells for a P/E ratio of just 11.8. MTS looks especially attractive to dividend-seeking investors, as the stock pays out 9.3% annually -- nearly twice the yield of AT&T or Verizon.
As the biggest bear in the Russian telecom market, analysts who follow MTS predict the stock will grow earnings at a respectable 9% rate over the next five years, which is also about twice the pace predicted for AT&T and Verizon. While not without risks, MTS's big dividend and low sticker price make it well worth a look.
Dan Caplinger has no position in any stocks mentioned. George Budwell has no position in any stocks mentioned. Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences and Verizon Communications. The Motley Fool has the following options: short June 2017 $70 calls on Gilead Sciences. The Motley Fool has a disclosure policy.