Until this week, the broad market had generally been plowing deeper into new-high territory. But take a closer look at the advances and you'll see the rally since October has been an oddly imbalanced one. Growth-oriented companies have performed considerably better than value names, and a handful of the very biggest names have done the lion's share of that bullish work.
Dividend stocks have been particularly poor performers, with the SPDR S&P Dividend ETF (SDY 0.01%) trailing the S&P 500 (SNPINDEX:^GSPC) by quite a bit over the course of the past year. Aside from this week's downturn, the all-inclusive index was up 20% for the past 12 months, versus a gain of less than 9% for the dividend-oriented ETF. Investors just aren't interested in income right now.
As veteran traders will attest, though, nothing lasts forever. It might not be a bad idea to start adding exposure to the market's laggards that have become undervalued of late. And, it may also be smart to scale back a bit on the big winners, some of which may be ripe for profit-taking.
To help make that strategic shift happen here's some insight into three of the market's most underappreciated dividend stocks right now.
Image source: Getty Images.
1. Wells Fargo: New settlement may finally get bank out of the dog house
It's been tough for investors to forget Wells Fargo (WFC 1.61%) was busted in 2016 after its bank employees opened at least 2 million fake credit card and deposit accounts in order to meet minimum sales requirements.
The well-publicized regulatory responses were not only numerous but lingering. Every time consumers and shareholders reached a point where they could forgive and forget, they were somehow reminded of the company's checkered past. A dark cloud has hung over the company for four years now.
All of it may finally be put in the past for good, though. The $3 billion fine the bank agreed to fork over to the U.S. Justice Department and Securities and Exchange Commission last week isn't chump change compared to the $17.9 billion in net income it reported for 2019. But, it's the last of the big bills it will have to pay. It's already settled up with the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau. That means everything it earns going forward it gets to keep or pass along to shareholders to bolster what's presently a dividend yield of 4.3%.
Data source: Thomson Reuters. Chart by author.
2. ExxonMobil: New investments could temper recent price setbacks
Veteran investors know all too well that a bet on an oil company like ExxonMobil (XOM -0.02%) is essentially a bet on oil prices. In fact, ExxonMobil shares have proven the premise (again) over the course of just the past few weeks. In step with crude's 17% stumble from its early January peak, ExxonMobil investors have suffered a 20% setback.
A closer look at Exxon's historical results reveals, however, that its bottom line isn't nearly as subject to these big swings as its top line is. That's largely because the cost of drilling and refining is somewhat steady, and regardless of almost any price, consumers and companies are going to buy gasoline and diesel fuel. Simply put, ExxonMobil can generally afford to pay what's once again become a reliable dividend, and still keep something to fund expansion into new or bigger projects.
Data source: Thomson Reuters. Chart by author.
Yes, the past four quarters have stretched things a bit thin, as crude prices have slipped unusually low. They may not persist. The U.S. Energy Information Administration is still calling for an average price of $55.71 per barrel for West Texas intermediate crude oil this year, with prices modeled to appreciate to just above $62 next year. Meanwhile, WTI crude is hovering just above $51 per barrel.
The X-factor: It's difficult to see now, but ExxonMobil has effectively doubled down on the United States' Permian Basin. There's a steep up-front cost involved, but the Permian's gas and oil are relatively cheap to extract once rigs are up and running.
3. Cisco Systems: Embracing change in its revenue model
Finally, income-minded investors may want to look closely at Cisco Systems (CSCO 1.52%). The 24% sell-off the stock's dished out since its July high has pushed its dividend yield up to a respectable 3.1%.
It's admittedly not a name one would expect to be mentioned in any discussion of dividend stocks. Cisco is a technology company -- still the iconic name in networking -- and the tech sector isn't exactly known for prioritizing payouts.
Data source: Thomson Reuters. Chart by author.
The institutional technology landscape market is going through some major changes though, and Cisco is embracing that change rather than resisting it. Namely, rather than buying software outright or purchasing it pre-programmed, corporations increasingly prefer to "rent" access to it. This grants software customers constant access to the newest developments, or in the case of hardware, the ability to reprogram or upgrade equipment using nothing but uploaded code rather than complete physical replacement of a component.
The end result is steady, recurring revenue. As of last quarter, 72% of Cisco's software was sold on a subscription basis.
