3 Embarrassingly Cheap Dividend Stocks

High yields. Low valuations. But with a couple of downsides to be aware of.

Keith Speights
Keith Speights
Aug 11, 2019 at 9:00AM
Health Care

What's better than a stock that pays you to own it? How about a stock that pays you to own it and is also really cheap?

Many investors, especially retirees, love dividend stocks because they pay out dividends on a regular basis. Some dividend stocks can be quite pricey because investors like them so much. But not all of them. Three dividend stocks appear to be embarrassingly cheap right now: AbbVie (NYSE:ABBV), CVS Health (NYSE:CVS), and Gilead Sciences (NASDAQ:GILD).

A file tab that says dividends on top of a one hundred dollar bill.

Image source: Getty Images.

1. AbbVie

AbbVie pays a mouthwatering dividend yield of nearly 6.6%. The big pharma stock is also dirt cheap right now, with shares trading at less than seven times expected earnings. Is there a catch with AbbVie? Of course.

Investors are worried about declining sales for Humira, with the drug already facing biosimilar competition in Europe and on the way for the U.S. market by 2023. Humira currently generates around 58% of AbbVie's total revenue.

However, AbbVie's planned acquisition of Allergan will significantly reduce its dependence on Humira. Even better, the company has several current drugs and pipeline candidates that should help offset the declining sales for Humira.

AbbVie's cancer drugs Imbruvica and Venclexta continue to enjoy strong momentum. Orilissa should become a blockbuster success in treating endometriosis and uterine fibroids. New immunology drugs Skyrizi and upadacitinib are also likely to generate billions of dollars in additional sales over the next few years.

2. CVS Health

CVS Health's dividend yield currently stands at 3.61%, a level that would catch any income-oriented investor's eye. The healthcare giant could also be viewed as a bargain, with its shares trading at a little over eight times expected earnings.

There are a couple of reasons behind CVS Health's low valuation. Many were skeptical about the company's acquisition of Aetna last year. With several presidential candidates advocating changes that would negatively impact the health insurance industry, doubts about the wisdom of the Aetna deal have intensified.

In addition, some investors continue to be worried about the potential threat that Amazon might pose to pharmacy retailers. The e-commerce leader's acquisition of online pharmacy PillPack signaled that it's serious about trying to disrupt the pharmacy market as it has other areas.

So far, though, CVS Health has been rocking along. The company recently announced second-quarter results that were much better than expected and raised its outlook for full-year 2019.


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3. Gilead Sciences

Gilead Sciences is something of a rarity: a biotech that pays a dividend. The company's dividend yields 3.85%. Its stock is also attractively valued, with shares trading at eight times expected earnings.

The story for Gilead over the last couple of years or so has centered around the sinking sales for its hepatitis C virus (HCV) drug franchise. Gilead's revenue and earnings fell quarter after quarter, as the biotech faced increasing competition in the HCV market and fewer patients were available because so many have been cured of hepatitis C thanks in large part to Gilead's drugs.

Now, however, Gilead appears to have turned a new page. The biotech returned to revenue growth in the first quarter of 2019 and continued its momentum in Q2. Gilead's resurgence has been powered primarily by its blockbuster HIV drug, Biktarvy.

The company could soon enter a new market. Gilead plans to file for approval for filgotinib in treating rheumatoid arthritis later this year. It's also seeking to expand its dominance in HIV and boost its oncology presence.

Two downsides to these bargain dividend stocks

AbbVie, CVS Health, and Gilead offer high dividend yields and are inexpensive relative to most stocks on the market. However, each stock also comes with a couple of big downsides.

First, none of these stocks is likely to deliver huge earnings growth in the near future. Wall Street analysts project low double-digit-percentage earnings growth over the next five years for all three stocks.

Second, each stock faces significant risks. AbbVie is embarking on its biggest acquisition ever, and it doesn't have a great track record overall when it comes to dealmaking. Both AbbVie and Gilead face stiff competition and the possibility that their pipeline candidates won't be successful. CVS Health is in the midst of integrating Aetna at a time of considerable uncertainty for pharmacy retailers and health insurers.

High-dividend yields and bargain share prices usually can't be obtained with sizzling earnings growth and low risk. Investors must be willing to accept those trade-offs before buying AbbVie, CVS Health, or Gilead Sciences.