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3 High-Yield Dividend Stocks That Just Went on Sale

By Daniel Foelber, Scott Levine, and Lee Samaha – Updated Aug 15, 2021 at 10:14AM

Key Points

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These industrial companies face setbacks but remain long-term winners.

Whether you're in retirement or simply looking to generate a little extra income, you've come to the right place. Stocks that pay dividends can be a great way to combine reliable returns with long-term upside. And with dividend stocks becoming increasingly hard to find, any discount the market provides is helpful.

With that, we asked some of our contributors which dividend stocks they think are on sale now. Caterpillar (CAT 0.19%), 3M (MMM 0.79%), and American Electric Power (AEP -1.41%) caught their attention. Here's what makes each a great buy now.

A worker operating a CNC machine in a production line.

Image source: Getty Images.

A Dividend Aristocrat poised for a breakout

Daniel Foelber (Caterpillar): Shares of Caterpillar are down more than 13% over the past three months. Despite posting impressive earnings, the heavy-equipment manufacturer has hit a rough patch on Wall Street. The main culprit isn't the company's results, but expectations.

In Q2 2020, all of Caterpillar's segments were hurting as North and South American sales plummeted. But things have turned around since then.

Caterpillar's Q2 2021 revenue and net income are both down around a mere 10% from their 2019 figures, which is impressive considering the business is still in recovery mode. 

Metric

Q2 2021

Q2 2020

Q2 2019

Revenue

$12.9 billion

$10 billion

$14.4 billion

Earnings per share

$2.56

$0.84

$2.83

Data source: Caterpillar. 

Caterpillar is still not offering full-year guidance, but it did hint during its Q2 2021 conference call that the third quarter should have strong revenue. Combined with its first-half results, Caterpillar could be in for a pretty good year.

Caterpillar's stock will look a whole lot cheaper if it can continue to steamroll past expectations. However, some context is key. Caterpillar is a cyclical stock. Its current valuation isn't based on its past results, but rather on how business could boom as the economy recovers. Dependence on the global energy, materials, and industrial economies has been a double-edged sword that leaves Caterpillar vulnerable to economic declines but perfectly positioned to capitalize on booms.

The issue is that Caterpillar's last uptrend was largely interrupted by the U.S.-China trade war. Right now, it's in the process of gaining back its momentum. First-half results gave us a taste of what that boom could look like, but sustained growth may be needed to appease Wall Street's appetite.

Momentum could be derailed by pandemic-related interruptions, macroeconomic factors, oil and gas prices, or a slew of other unknowns. In short, Caterpillar stock needs to "prove" it's worth all the hype. But given the company's track record, it very well could be. In the meantime, investors can take solace in the fact that Caterpillar is a Dividend Aristocrat, meaning it has increased its annual payout for over 25 consecutive years. Shares of Caterpillar yield 2.1% at the time of this writing.

3M faces headwinds, but the stock is a good value

Lee Samaha (3M): The industrial conglomerate isn't the highest-=quality industrial stock out there, but it is a great dividend option for investors. The Dividend Aristocrat's nearly 3% dividend yield is very well covered by the company's free cash flow. As such, 3M's dividend is not in doubt, and there's ample room for management to increase it.

MMM Free Cash Flow Per Share Chart

Data by YCharts

That said, there are some question marks around the company. The rise in raw-material prices is pressuring profit margins, and 3M faces potential liability from its production of perfluoroalkyl and polyfluoroalkyl substance (PFAS) chemicals.

Still, 3M looks significantly undervalued next to its peers. The market appears to have given 3M a valuation that provides a very wide margin of safety for the PFAS risk. Moreover, 3M's end markets are all turning up in line with the improving economy, so revenue growth is likely to offset margin pressure as the company goes through 2021.

All told, 3M still offers investors the prospect of an excellent dividend yield and long-term growth prospects. That's usually good enough for value-orientated investors.

Go American to charge up your passive income

Scott Levine (American Electric Power): Looking to electrify your portfolio with a high-yield opportunity? American Electric Power, with its 3.3% dividend yield, belongs on your radar. The company operates the largest electricity transmission network in the United States. Providing power to approximately 5.5 million customers, American Electricity Power's service territory makes up about 200,000 square miles spanning 11 states.

While the company hasn't achieved the noble status of becoming a Dividend Aristocrat, its 11 years of growing its annual dividend is certainly noteworthy. From 2011 through 2020, in fact, the company has increased its payout to shareholders at a 4.9% compound annual growth rate. Conservative investors wary of whether the company has jeopardized its financial health to satisfy shareholders can rest easily; over the past four years, American Electric Power has averaged a payout ratio of 65%.

Forecasting 2021 earnings per share of $4.53 to $4.73, the company seems confident that it will achieve bottom-line growth over last year, when it reported EPS of $4.42. But that's not what's powering my belief that this stock deserves a closer look. As momentum behind the infrastructure bill builds, American Electric Power seems poised to benefit considerably. Besides the $73 billion in spending to upgrade the electric grid, the infrastructure bill targets $7.5 billion for developing a nationwide EV-charging infrastructure.

Over the past few days, shares have dipped a little. The stock is now trading around 5% below its 52-week range, but it seems like a bargain. Currently, shares are valued at 18.9 times trailing earnings -- a discount to their five-year average multiple of 27.3. And that's not the only perspective from which they seem attractively priced. The stock is trading at about 2.8 times sales, representing a discount to the S&P 500, which has a 3.2 sales multiple.

Scott Levine has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.

Stocks Mentioned

Caterpillar Stock Quote
Caterpillar
CAT
$236.13 (0.19%) $0.44
3m Stock Quote
3m
MMM
$126.99 (0.79%) $1.00
American Electric Power Stock Quote
American Electric Power
AEP
$95.12 (-1.41%) $-1.36

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

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