Supply chain issues, inflation, rising COVID-19 cases, and China's Evergrande Group crisis are just a few of the fears rippling through markets right now. The U.S. stock market remains one of the best places to park savings long term. But some investors may be interested in rebalancing their portfolio toward value stocks or dividend-paying stocks with strong fundamentals.
This dividend stock hardly costs a pretty penny
Scott Levine (Southern Copper): The market sell-off earlier this week may have frightened some investors, but those who are more familiar -- and comfortable -- with the occasional volatility started checking to see if they could scoop up some stocks on sale. With the market rapidly rebounding, however, the chance to pick up some tickers on the cheap seems to have been short-lived. That is, unless you're talking about Southern Copper. Investors can still find the copper mining leader's stock on the discount rack, making it worthy of consideration for budget-conscious investors looking for a quality dividend stock.
Southern Copper's stock, which offers a 6.3% dividend yield, is trading well below its average valuation. Currently, the stock is trading at 11.8 times operating cash flow, representing a noticeable discount to its five-year average multiple of 19. Prefer the old price-to-earnings ratio? No problem -- the stock still seems attractive, trading at 15.7 times trailing earnings, a steep discount to its five-year average P/E of 29.4.
Although the stock's high dividend yield may give some investors pause, it's important to recognize that the company doesn't have a history of jeopardizing its financial health to please investors with a high distribution. Over the past five years, for example, Southern Copper has an average payout ratio of 63%. Additionally, Southern Copper generates strong free cash flow (FCF). In 2020, for example, the company generated FCF of $2.21 per share -- an amount that more than covered the $1.50 that it returned to shareholders.
Granted, Southern Copper is a commodity stock, meaning that it's highly correlated with the market price of copper, but it's worth noting that copper demand is expected to remain strong over the next few years as consumer demand for electric vehicles continues to rise as well as other renewable energy solutions that depend on electrical wiring, including solar and wind power.
Arguably the best dividend stock in the S&P 500
Daniel Foelber (Lockheed Martin): It's official. Lockheed Martin's dividend yield now exceeds 3%. It may not sound like much, but a 3% yield from a top-tier industrial stock is an increasingly rare feat.
Of the 75 industrial stocks that are components of the S&P 500, only Lockheed Martin and 3M (MMM 0.79%) have a dividend yield above 3%. Yet Lockheed is a much cheaper stock than 3M from a price-to-earnings (P/E) and price-to-sales (P/S) perspective.
Lockheed may not be a fast grower, but there's a valid argument that it could be one of the best all-around dividend stocks in the S&P 500. Its qualities include a huge backlog of orders, a trusted buyer (its largest customer is the U.S. government), a strong balance sheet, and stable earnings. Lockheed was one of the few industrial companies to post a record top and bottom line in 2020 -- a year where many cyclical companies had some of their worst performances in recent history.
Compared to peers like Boeing, Raytheon Technologies, and Honeywell, Lockheed has less exposure to the commercial aviation industry -- which is a favorable position given that airlines are still recovering from the COVID-19 pandemic. In addition to aeronautics, Lockheed manufactures and services missiles and fire control, rotary, and mission systems, and has a growing space business. Put another way, the company is involved in a diverse array of Pentagon projects, not just fighter jets.
Add it all up, and Lockheed Martin's combination of income and value makes it a great stock for risk-averse investors and retirees.
An undervalued industrial giant
Lee Samaha (Siemens): Germany's industrial giant doesn't get as much attention as it should from investors. Sporting a 2.5% dividend yield, and on track for 6.4 billion euros in FCF in 2021 (compared to dividends paid to shareholders of 3.2 billion euros in 2020), Siemens is attractive for dividend seekers.
In addition, its growth potential should not be underestimated. Its smart infrastructure segment can benefit from the growth in smart connected buildings and the trend toward electrification in the economy. Furthermore, companies in this area have growth opportunities due to the need to reduce carbon emissions from buildings and the explosion of interest in smart building technology.
Meanwhile, the digital industries segment is a global leader in process and industrial automation and motion control -- both businesses support its fast-growing industrial software business. Automation is an industry on a good growth trend in itself, but throw in the added value created by digital technologies (the Internet of Things, digital twins, augmented reality, etc.), and its growth prospects look excellent. Siemens offers both automation and industrial software solutions.
Management believes the smart infrastructure and digital industries segments can grow revenue at a double-digit rate over the medium term. Meanwhile, its 75% stake in leading healthcare imaging, diagnostics, and device company Siemens Healthineers generates stable earnings and cash flows to reinvest in the overall business.
All told, Siemens is an attractive company trading with a useful dividend yield.