For many, the stock of Coca-Cola (KO 0.42%) has long been a safe-haven stock due to its unbeatable brand, unmatched distribution, high-margin business model, and excellent management. Yet after several years of stagnation, the stock appreciated 28.4% over the past year. After its recent run, Coke's P/E ratio has soared to 31.7, and its dividend yield has fallen to 2.8%.
For dividend investors looking for a higher payout and cheaper valuation, here are three solid picks that all sport yields over 4% and trade at valuations much lower than Coca-Cola's.
Dividend picks like these offer solid dividends of 4% or higher. Image source: Getty Images.
Seagate Technology
The stock of Seagate Technology (STX +0.00%) happens to look very cheap at this moment, trading at just 9.7 times earnings and sporting a dividend yield of 4.3%. And this cheap valuation comes after Seagate has run up 59% over the past year!
Seagate is one of only three major companies that produce hard disk drives, a preferred medium for bulk computing storage. That oligopoly has allowed all three players to remain profitable through the ups and downs of this cyclical industry. In the third quarter of 2019, Seagate had leading market share, with roughly 40.2% of the HDD market.
Fortunately for all memory and storage companies, the industry appears to be hitting a cyclical bottom, which has lit a fire under all of these stocks. Yet Seagate still trades at a low valuation compared to the rest of the market due to the cyclicality of its industry.
Nevertheless, the long-term outlook for memory and storage is bright. Big data applications require vast amounts of storage, as artificial intelligence applications require huge data sets to train algorithms. That should benefit the storage industry in the long run, albeit with some peaks and troughs along the way.
One risk to watch out for is the encroachment of NAND-flash-based solid state drives against HDDs. Seagate doesn't own NAND technology outright, but does manufacture solid state drives with outside NAND, due to its expertise in designing storage systems.
NAND is a more resilient and speedy storage technology, but HDDs have traditionally been the much cheaper option. However, the recent crash in NAND prices appears to have spurred demand for NAND in more applications, and some fear they will eventually replace HDDs.
However, Seagate and HDD rivals have been investing for years in new technology called heat-assisted magnetic recording (HAMR) disk drives, which will hit the market in 2020. Management believes HAMR drives will greatly increase their density over the next decade, driving down costs-per-GB and keeping HDDs as the lowest-cost bulk storage option for the foreseeable future.
I tend to agree that HDDs will be around for a long time to come. Given the long-term need for bulk storage and the consolidated nature of the HDD industry, Seagate looks like a solid dividend pick going forward.
Verizon Communications
As people increasingly depend on their mobile devices for more everyday tasks, having a good connection is increasingly important. That's why Verizon (VZ +2.36%) may be worth a look for dividend investors today. Verizon may not hit it out of the park in terms of growth, but its safety and solid 4.1% yield make it a pretty solid pick. Though rival AT&T has launched itself headlong into the content and streaming wars, Verizon, under relatively new CEO Hans Vestberg, has gone the other way, concentrating on the company's best-in-class network and de-emphasizing former management's foray into digital media.
That strategy seems to be paying dividends, literally and figuratively. Last quarter, Verizon added gross postpaid subscribers at that highest rate in the last five years. Meanwhile, operating expenses ticked down as the company streamlined its business, causing operating income to grow a solid 6.6% on just 0.9% revenue growth. This came even as the company stepped up investments in its 5G network, which reached 15 cities through the third quarter.
Having the No. 1 network (according to most third-party estimates) has allowed Verizon to partner with other top companies. When Charter Communications and Comcast needed a wholesale partner for their new mobile offerings, they turned to Verizon. Verizon also partnered with Disney on a promotion to offer a free year of Disney+ for Verizon Unlimited customers, and Verizon became the exclusive wireless partner for Disney+ as well. In addition, Verizon recently partnered with leading enterprise software firm SAP on next-generation enterprise solutions and connectivity. Verizon's leading position and entrenched status in the industry should keep its stock steady and its high dividend intact.
Wells Fargo
For those looking for beaten-down turnaround stories, Wells Fargo (WFC +1.05%) is off to an auspicious start in 2020. Its fourth-quarter earnings report disappointed investors -- even excluding a $1.5 billion litigation charge, adjusted earnings per share of $0.93 fell well short of expectations of $1.10. The ensuing sell-off has pushed down Wells' P/E ratio to about 12 and its dividend yield up to 4.2% again.
Nevertheless, the company has a new CEO in Charles Scharf, who came on board in October, and Wells Fargo is still under an asset cap imposed by the Federal Reserve as a result of the company's past scandals. Eventually, these headwinds could pass with time, and if Scharf makes necessary changes, Wells Fargo could emerge from years of underperformance relative to other banks.
Nevertheless, Scharf is just getting started on the job. On the recent conference call with analysts, he hinted at several cultural and organizational changes he's implementing at the company going forward. These plans could take some time to achieve, and Wells Fargo will also have to gain back the trust of customers.
However, investors are getting paid almost 4.2% to wait for Scharf to do his work, not to mention Wells' enormous buyback program, which retired 3.4% of the company's stock just in the fourth quarter alone! For the full year, Wells was able to decrease its shares outstanding by 10%. While the company certainly experienced headwinds related to interest rates and above-normal costs, both deposits and loans grew in 2019, and the company's charge-offs remain at historic lows, showing that the company's underwriting ability hasn't been affected. Overall, time and a new CEO may be all Wells Fargo needs to get back on track.
