3 Dividend Stocks You Haven't Thought Of

These three overlooked dividend stocks offer strong growth potential and high yields.

Neha Chamaria
Neha Chamaria, George Budwell, and Rich Smith
Jun 9, 2017 at 9:05AM
Energy, Materials, and Utilities

Dividend stocks are becoming increasingly popular among investors as a means to supplement their income and build wealth over the long run. But when it comes to choosing a dividend stock, investors often go for popular names and overlook stocks that may offer strong dividends in terms of yields, growth, or both. Three such dividend stocks you may not have thought of are DineEquity (NYSE:DIN), PetMed Express (NASDAQ:PETS), and AES Corp. (NYSE:AES).

Welcome to the International House of Dividends

Rich Smith (DineEquity): Pancakes smothered in butter and dripping with maple syrup. Who can resist 'em? Apparently, quite a lot of folks can, because DineEquity, owner of the International House of Pancakes chain (and Applebee's, too), has seen its sales slide year over year for five consecutive quarters.

Profits, on the other hand, have proven more resilient, with some quarters up and some down. While GAAP 2016 profits were off 6.5% in comparison to 2015's monster $105 million year, DineEquity is still producing mountains of cash from its business. Over the past 12 months, the company generated positive free cash flow of $92.4 million, which was 6.5% above reported GAAP income. And with cash still flowing strongly, DineEquity is offering its shareholders a massive incentive to own the stock -- a dividend yield of 8.1%. 

Growing plant on a stack of coins

Image source: Getty Images

That's a level of dividend largesse more often associated with rock-steady recurring revenue businesses such as utilities and telecoms. It's not something you often find in the more cyclical and trend-driven restaurant sector --  and that may make DineEquity a kind of dividend stock you haven't thought of looking into. Is it worth a look?

I think so. Priced at less than 10 times earnings, and expected to rebound from its recent weakness as early as this year (analysts forecast profits of $5.11 per share this year, up 24% from 2016), DineEquity offers a rare combination of recognizable brand name, the potential for strong earnings growth, and a great dividend. If you haven't thought of owning this one before, maybe you should.

This small-cap growth stock is also a fantastic dividend play

George Budwell (PetMed Express): Over the past three years, shares of the online pet pharmacy PetMed Express have appreciated by nearly 170%. While PetMed's surging top line and improving margins are a big reason why, management's decision to continually up the company's dividend has also probably contributed to its rapid growth in a big way as well.

Despite sporting a market cap of only $726 million, for instance, PetMed comes with a respectable yield of 2.24% and a 12-month trailing payout ratio of only 65%. Since the company doesn't have to plow capital into cash-intensive projects like building stores or conducting clinical studies, I think it's reasonable to assume that PetMed's dividend is not only sustainable, but it likely has considerable room to grow in the coming years.

The particularly juicy part of PetMed's story is that its astronomical growth has been fueled solely by sales within the United States. Eventually, I believe this online pet pharmacy will branch out to pet-friendly markets abroad, where its sales could perhaps double or even triple from current levels.    

Now, the one serious concern regarding this company is its conflict with the interests of veterinarians -- especially those who own private practices. Veterinarians, after all, often supplement their own income by selling pet supplies and meds, which puts them in direct competition with online retailers like PetMed Express. Having said that, PetMed Express appears to have overcome this hurdle to a large degree through its highly successful online marketing campaign. 

All told, PetMed Express offers top-notch growth prospects and a dividend that appears to be sustainable for the long haul. 

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Neha Chamaria (AES Corp.): Utility stocks have come under a bit of pressure this year, but if you could get your hands on a company that's expanding its footprint in the renewable energy space and is committed to shareholders, I'd urge you to give AES Corp., which currently yields 4%, a second look.

To be fair, AES is a pretty young dividend company that started paying an annual dividend only in 2013. However, a strong portfolio that comprises seven utility subsidiaries and presence across four continents has helped AES generate strong returns and nearly triple its annual dividend since 2013.

Solar panels and wind energy.

Image source: Getty Images.

What's most exciting about AES is its focus on clean energy. Last year, the company generated roughly 27% of its power from sources like wind, solar, and hydro. In line with its efforts to strengthen its footprint further, AES sold 3.7 GW of merchant coal-fired generation assets in Kazakhstan and Ohio during the first quarter of this year. At the same time, the company struck a deal to acquire majority stake in sPower, the largest privately owned solar assets operator in the U.S. The acquisition will expand AES' total renewable energy projects portfolio by roughly 15% to 9,552 MW.

AES clearly has a lot of growth potential, and it's already giving income investors enough reasons to be excited about: AES expects to grow its adjusted earnings, free cash flow, and dividends by 8%-10% annually through 2020. With that kind of projections, I think AES is one of those promising high-yield stocks that you could consider adding to your portfolio today.