High dividend yields aren't necessarily looked upon very fondly by investors because they're potentially seen as a sign that the best days are behind a company. When a company doesn't have significant investment opportunities within its own operations, the best use of cash is to return it to shareholders and when those payouts yield 4% or more it can be a sign of long-term weakness.
But there can be opportunities in dividend stocks that the market is underestimating. Three that I think are overlooked are Verizon Communications (VZ 2.85%), Kraft Heinz (KHC -0.21%), and Walgreens Boots Alliance (WBA -0.93%) and they may have more growth opportunities ahead than investors think.
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A 5G dividend
The market is treating Verizon and other wireless carriers like they're utility stocks today, and in some ways, that's not a bad way to look at the industry. Wireless companies provide an essential service, have limited ability to raise prices, and are ultimately great dividend stocks just like utilities. And Verizon is arguably the best of the wireless stocks with a 4.1% dividend yield.
But wireless companies also have more growth opportunities than utilities and I think Verizon could be a growth stock in the making. 5G has now launched, and millions of devices will begin connecting to 5G networks like Verizon's. Each of those connections from watches, VR headsets, cars, homes, and more are new revenue opportunities and create the opportunity for bundling. And the company is set up well to capitalize.
One opportunity I want to highlight is the home broadband option with a 5G connection that's beginning to launch. Until now, homeowners have been dependent on cable companies or DSL connections for most internet connections, but 5G is going to penetrate that market with ultra-fast speed. Where available, 5G for the home will allow for an internet connection that's faster (and potentially more reliable) than cable and maybe a lower cost if early pricing of $30 for existing customers holds true.
A grocery store staple
The food business isn't exactly a growth business in 2020 and there are multiple pressure points on the industry that are especially worrisome for big established food brands. The two I'm most worried about for a company like Kraft Heinz is consumer preference for local, boutique brands and the emergence of food delivery services that don't need brand name condiments in their boxes. Those are risks, but there are opportunities as well.
As much as there are risks facing food producers, I think their brand awareness, operational efficiency, and momentum will keep the cash rolling in for decades. You can see below that Kraft Heinz's revenue has been stagnant for a few years, but free cash flow is on the rise as it focuses on efficiency.
KHC Revenue (TTM) data by YCharts
The cash flow is what investors should worry most about when considering this 4.9% dividend yield. Even if cash flow is flat, this is a dividend that could be paid regularly for decades, which is all dividend investors should hope for in the grocery business.
The undervalued pharmacy stock
Walgreens Boots Alliance pays a lofty dividend yield of 4.8% and is being underestimated by the market. The company is a critical pharmacy for millions of consumers and provides retail products at small, strategically placed locations. But the stock has lost over half of its value since peaking a few years ago.
WBA Revenue (TTM) data by YCharts
The view from the market is that free cash flow is declining and competition from online retailers like Amazon (AMZN 1.30%), which recently launched a pharmacy, will eat away at the company's profitability. On the cash flow side, investors should watch margins and profitability, but I think what we're seeing are natural ebbs and flows in a business. As far as Amazon goes, it hasn't been able to disrupt mobile phones, groceries, or healthcare in ways that investors once feared, so this product may not be the disruptor investors fear, either.
Meanwhile, Walgreens Boots Alliance revenue continues to grow slowly but surely. You can see above that revenue is up and while free cash flow is declining for now, the company is only valued at 8.2 times free cash flow. That's an incredible value and when you include the high dividend yield, this is a top dividend stock today.
Great dividend buys today
For one reason or another, each of these stocks is being overlooked by the market. Long-term investors willing to look at the fundamentally important role Verizon, Kraft Heinz, and Walgreens Boots Alliance play in our economy and the consistency of their cash flow should love their cheap stocks and high dividend yields today.
