The Federal Reserve has made it tough on both income and value investors. By cutting interest rates, it has made it harder to find attractive yielding investments. Meanwhile, the Fed has pumped so much money into the system that it has inflated asset values.
However, there are a few hidden gems out there for investors willing to dig around a little bit. Three that our contributors have uncovered are diversified industrial manufacturer 3M (MMM -1.05%), master limited partnership MPLX (MPLX 0.70%), and infrastructure owner Brookfield Infrastructure (BIP -0.47%) (BIPC 0.32%). These stocks trade at surprisingly cheap values, which is why they all offer well-above-average dividend yields.
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A historically generous opportunity
Reuben Gregg Brewer (3M): Although most people look at things like price-to-earnings and price-to-book value when considering the "value" of an investment, dividend yield can be just as useful in identifying cheap stocks. And today, 3M's yield is near the high end of its historical range even though the absolute yield is a somewhat modest 3.3%.
MMM Dividend Yield data by YCharts
There's actually a lot to like here for long-term dividend investors. For starters, the industrial giant has increased its dividend annually for over 60 years, more than twice the level needed to achieve Dividend Aristocrat status (some people would call 3M a Dividend King). The average annualized dividend increase over the past decade, meanwhile, is a robust 10%. Recent hikes have been far more modest (the last one was just 1%), but that's not shocking given the coronavirus pandemic.
The relatively cheap price, meanwhile, is largely related to product and environmental lawsuits 3M is facing. These could end up costing the company a lot of money. However, it has a $100 billion market cap, modest leverage, and an investment-grade rated balance sheet. It should be able to handle these issues in stride. In the meantime, it would be a shame to waste the opportunity to buy a great company like 3M while it's trading at bargain level prices.
A bottom-of-the-barrel valuation
Matt DiLallo (MPLX): Units of midstream MLP MPLX have been under pressure due to all the turbulence in the oil market. While they've recovered from their deep dive during the oil market sell-off in 2020 -- units were down as much as 70% at the bottom -- they've still declined by about 6% since the start of last year and roughly 30% over the past three. That weakness comes even though the MLP has continued to grow its earnings and cash flow. Despite last year's market mayhem, MPLX's earnings and cash flow rose 2.1% and 5.5%, respectively, as it benefited from recently completed expansion projects.
With its unit price falling and earnings rising, MPLX trades at an increasingly cheaper valuation. It generated $4.02 per unit in cash last year. Meanwhile, units recently changed hands at around $24 apiece. That implies MPLX sells for less than six times its cash flow, which is dirt cheap for a company that produces a growing stream of durable cash flow and has an improving balance sheet.
MPLX is generating enough cash to cover its dividend -- which currently yields an eye-popping 11.5% -- and its expansion program with room to spare. Since it already has a solid financial profile, the MLP plans to use its excess cash to repurchase its dirt-cheap units. It bought $44 million during the fourth quarter of last year and could repurchase an increasing amount in 2021 since it expects its cash flow to continue rising while capital spending should wind down. The company clearly believes its stock is too cheap to ignore. That's why dividend investors won't want to miss out on this potentially high-upside story, as the continued recovery in the oil market could eventually give its valuation a big boost.
Neha Chamaria (Brookfield Infrastructure Partners): (BIP -0.47%) (BIPC 0.32%) Brookfield Infrastructure is one heck of a dividend stock. It has grown its dividend at a compound annual growth rate of 10% since its inception in 2009 and currently yields a good 3.9%. That dividend growth has played a huge role in driving up returns for shareholders over the years.
Earlier this month, Brookfield reported strong numbers for 2020, growing its funds from operations by 5% to $1.45 billion despite challenging business conditions because of the COVID-19 pandemic. Credit largely goes to the resilient, regulated, and contracted nature of the bulk of the assets the company is invested in, such as utilities, data, and transportation. To top that, Brookfield is consistently investing in growth. Last year, it invested nearly $2.5 billion on several assets, including telecom towers in the U.K. and India and an LNG export facility in the U.S.
Importantly for shareholders, 2021 should be a strong year for Brookfield as these assets start contributing to its top line even as global economies recover. In fact, the company has already set the growth ball rolling, having just made an offer to acquire Canada-based energy infrastructure company Inter Pipeline.
Brookfield stock may have rallied double digits in 2020, but it's still trading at a substantial discount to its five-year average price-to-cash flow of roughly nine times. For a company that's growing its cash flows at strong pace, targeting annual investments worth more than $2 billion over the next three to five years, and aiming to grow dividend by 5% to 9% annually, the investing thesis for Brookfield Infrastructure shares is too compelling to ignore right now.
