Investors looking for stocks that pay dividends sometimes see a high yield and think it's a good deal. But a high dividend yield can also be a warning sign since it can just be the result of a company with problems and a falling share price.
It's often more instructive to look at the current dividend yields as compared to the company's dividend history, as well as investigating the outlook for the business, to see if you can find dividend payers that would be considered as attractive investments today.
Let's look at two companies that fit that description and why they qualify as cheap dividend stocks worth buying right now.
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Presented with an opportunity
The dividend yields of Hasbro (HAS -0.38%) and Home Depot (HD -0.60%) both spiked when recent market volatility hit their individual share prices. A high confidence level in the business has resulted in a strong stock price recovery for Home Depot, while Hasbro shares remain suppressed. But both still have dividend yields above the levels seen in the last few years, and both should have bright futures in their own way.
HD Dividend Yield data by YCharts.
An extended agreement and new acquisition
The stock price of Hasbro has been hit by concerns over COVID-19, from supply chain worries to consumer demand. The company makes popular toy brands like Transformers, Play-Doh, and Nerf, as well as toys for the Walt Disney (DIS -0.83%) Marvel and Star Wars movies.
On Feb. 21, Hasbro renewed a multiyear agreement on the Disney franchises that should see benefits from the popularity of the Disney+ streaming service. Characters in the licensing agreement include Baby Yoda from The Mandalorian, and Marvel's Spider-Man, Black Widow, Iron Man, Captain America, and Black Panther.
Image source: Getty Images.
Hasbro recently completed its acquisition of Entertainment One (eOne) to add pre-school brands and immersive TV and film experiences, which it believes will be fully integrated by the end of 2020.
The company said in its first-quarter earnings release that it is managing supply chain issues and working to quickly recapture lost production related to the COVID-19 pandemic. It also said that demand for its products increased in the first quarter, led by Play-Doh and games such as Monopoly, as families spend more time at home.
A focus on digital sales
Home Depot announced a new strategy, called One Home Depot, in late 2017. The $11 billion investment program includes not just online sales, which are growing at over 20%, but also business-to-business (B2B) improvements for its professional customers. Its contractor business represents about 45% of total sales, and the company believes it added over 1 million new customers through its B2B website in 2019.
Comparable-store sales grew by 3.5% in 2019, including 5.2% in the fourth quarter. This growth in the business has allowed the company to substantially grow its dividend payout.
Secure dividends
Both Home Depot and Hasbro have a nice record of dividend increases. Over the last five years, though, Home Depot has outpaced Hasbro in that metric.
HD Dividend data by YCharts.
The COVID-19 pandemic has done more harm to Hasbro than Home Depot, whose stores have remained open. It may even benefit the latter as people look to keep busy by doing household projects while staying home during the crisis. But Hasbro currently has a solid dividend yield of 4%, and bright prospects for its business once pandemic impacts retreat.
In the meantime, Hasbro said in its recent earnings release that its board remains committed to the dividend. The company spent $93.2 million in dividend payments during the first quarter of 2020. As the chart below shows, both companies have ample cash flow to support continuing dividends.
HD Cash from Operations (Quarterly) data by YCharts.
These payments, along with solid prospects, make both of these stocks a buy at today's levels.
