Dividend stocks are in high demand, and that has made many top dividend stocks extremely expensive. Yet in rare cases, you can find high-yield dividend stocks that, for whatever reason, have fallen out of favor. When you do, you'll need to look closely to make sure these cheap dividend stocks aren't actually value traps that have been beaten down for a reason. Below, you'll learn more about Bank of Nova Scotia (BNS -1.01%), IBM (IBM 0.72%), and Toyota Motor (TM 0.97%) to see whether they're worth a closer look for your portfolio.
Bank on Canadian success
The Canadian banking system has gotten a lot of respect from U.S. investors over the past decade. Unlike their U.S. counterparts, Canadian banks like ScotiaBank held up extremely well during 2008's financial crisis, and that has helped power impressive gains for their shares over time. ScotiaBank in particular has done a good job of extending its reach across the globe, and revenue and income growth have stemmed in large part from its ability to tap into the different trends that prevail across various geographical areas.
Image source: Bank of Nova Scotia.
ScotiaBank has a yield of almost 4%, but it currently trades at just 13 times its trailing earnings over the past 12 months. That valuation reflects in part the historical levels at which banks tend to trade, but it also seems to indicate some concerns that many share about the possibility of a bubble brewing in the Canadian housing market. Nevertheless, naysayers have been crying wolf for years now, and with its international scope, ScotiaBank would be well-positioned to survive even if Canada's housing market does suffer a dramatic downturn.
Big Blue has had the blues
IBM is the company behind the personal computer, with a history of innovation that dates back for decades. Yet more recently, IBM has struggled to keep its position within the technology industry, as efforts to remain among the leaders in software, services, and various hardware products like data centers have run into intense competition on multiple fronts. For nearly five straight years, IBM has seen its revenue steadily decline, and even its nearly 4% dividend yield hasn't given investors much confidence in its future prospects. The stock currently trades at less than 13 times its trailing earnings.
After a tough run, some investors are getting more bullish on IBM now. The company has redoubled its efforts in key areas like cloud computing and data analytics, and long-term restructuring efforts look like they're moving in the right direction. Investors will need to be patient with the stock, but IBM's history of success gives it a good chance to rediscover future growth and make the current share price look ridiculously cheap.
Driving higher
Finally, Toyota Motor has the cheapest valuation of these three stocks, with a trailing price-to-earnings ratio of about 10 and a similar multiple on a forward-looking basis. Although it follows the international practice of making less regular dividend payments, the yield based on what it has paid over the past 12 months works out to about 3.6%.
Investors have been skeptical about automakers in general, and Toyota hasn't been able to avoid the perception that auto sales in the U.S. have peaked and will therefore lead to falling revenue and earnings in future years. Toyota has already started to see signs of that potential adverse trend, with its most recent quarterly results including a more than 20% drop in full-year net income that marked the first year-over-year decline in five years. Yet even though Toyota's car offerings have hit tough times, SUVs have done a good job of picking up the pace, and that has helped cushion the blow for the Japanese automaker.
It's rare to find dividend stocks that are good values as well. In the case of Toyota, IBM, and ScotiaBank, there are reasons why the stocks trade at attractive valuations, but even with some concerns, their prospects for bouncing back while sustaining their lucrative dividends look pretty good.
