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3 Embarrassingly Cheap Dividend Stocks

By Chuck Saletta - Jan 27, 2021 at 9:30AM

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In a time when investors are bidding up the prices of income-producing assets, these companies may still be offering decent payments at reasonable prices.

In today's low-interest-rate environment, investors are increasingly looking to dividend stocks when it comes to getting income from their portfolios. That has led to a rise in the prices of many of those stocks, making it harder to find good values among the best dividend payers in the market.

Companies with both good dividends and reasonable prices are still out there, but their low prices tend to reflect risks to their operations that the market is legitimately worried about. These three embarrassingly cheap dividend stocks may end up being incredible combinations of value and income for investors who are willing to brave those risks. If those investors turn out to be right, that combination could turn out to be the foundation of some very strong future returns.

Investor looking at a rising stack of coins.

Image source: Getty Images.

1. The energy pipeline giant that has been humbled by its past promises

Kinder Morgan (KMI 1.48%) owns and operates one of the largest energy pipeline networks in the United States. That it owns and operates so many existing pipelines gives it an incredible advantage in a political climate where the construction of new pipeline capacity is so vigorously opposed. In effect, such opposition makes Kinder Morgan's existing capacity that much more valuable, since pipelines remain a cheaper, safer, and less energy-intensive way of transporting oil and natural gas.

Despite the situation Kinder Morgan finds itself in, it currently trades at around a modest 10 times its trailing operating profits, and it offers investors a nearly 6.9% annual yield. A key reason for this is that back in 2015, it was forced to cut its dividend as its balance sheet got stretched too thin. Income-oriented investors hate dividend cuts and sold off its shares on the news. They have been slow to return, even as Kinder Morgan has cleaned up its balance sheet and begun restoring its dividend.

As a result, even in today's frothy market, Kinder Morgan is available at what looks like a reasonable-to-cheap price and offers investors a decent yield for the risks they take in owning its shares.

2. A mortgage lender with a unique spin on a rough industry

House on top of a mortgage application.

Image source: Getty Images.

Broadmark Realty Capital (BRMK 3.09%) is a real estate investment trust that focuses on hard money lending for things like construction loans. That's a really tough business to operate in, and as a real estate investment trust, Broadmark Realty Capital must pay out at least 90% of its earnings in the form of dividends. On the surface, that combination may make it seem like a very high-risk business, but it does something few others in its industry do: It operates with no debt of its own on its balance sheet.

That lack of any debt of its own means Broadmark Realty Capital can be much more flexible and opportunistic than other lenders. It can do that because it doesn't have to reserve a significant chunk of its own cash to pay the mandatory bills that come from taking out loans. As a result, its yield, which sits at around 7.9%, is juicy for ordinary companies but is actually well below several other mortgage REITs. That flexibility is important at a time when a global pandemic has slowed many construction projects.

In addition to that yield, Broadmark Realty Capital trades only slightly above its book value, which provides a decent reason to believe investors are buying its assets and income at a reasonable price.

3. A company in tune with the country's changing demographics

Person in a wheelchair

Image source: Getty Images.

Omega Healthcare Investors (OHI 3.07%) is also a real estate investment trust, but this one focuses on assisted living facilities and nursing homes. As America's population ages, there will be more seniors who need help with their everyday lives. In addition, as people have fewer children, it becomes more likely that those seniors will rely on professional help rather than family to cover those needs.

Importantly, Omega Healthcare Investors was able to maintain its dividend in 2020, despite the fact that the COVID-19 pandemic has affected senior citizens disproportionately. Now that vaccines are available and being prioritized for those in nursing homes, that near-term risk to its business looks like it may be starting to ebb. That provides a good reason to believe that it can continue to operate and thrive over time as things begin to return to normal.

Omega Healthcare Investors' yield currently sits at around 7.4%, and those dividends look reasonably covered by the company's operating cash flows, despite the challenges that 2020 brought. With a market capitalization around $8.2 billion supported by around $618 million of operating cash flows, the company trades at around 13 times operating cash flow. If you assume modest growth as COVID-19 fades and demographic trends once again dominate its business, it looks like a reasonable value.

Look beyond the surface to find dividends at reasonable prices.

Kinder Morgan, Broadmark Realty Capital, and Omega Healthcare Investors all offer their investors decent payouts and are available at reasonable valuations. In an era where investors are bidding up dividend stocks in an attempt to get income from their portfolios, that combination is getting harder to find.

That you can buy them at such reasonable prices in this environment reflects the fact that their businesses face legitimate challenges. Still, there are good reasons to believe they will survive -- and ultimately thrive. If they do, their investors should be well rewarded over time, beginning with the solid payments they get for buying during these challenging times.

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Stocks Mentioned

Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
$16.48 (1.48%) $0.24
Omega Healthcare Investors, Inc. Stock Quote
Omega Healthcare Investors, Inc.
$29.19 (3.07%) $0.87
Broadmark Realty Capital Inc. Stock Quote
Broadmark Realty Capital Inc.
$7.01 (3.09%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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