Even after the S&P 500 index's 17% drop to start this year, its dividend yield remains largely uninspiring at about 1.5%. Yet, with so many stocks off their highs, now could be an excellent time to search out some potential bargains. After all, the stock market is a market of stocks, which means there are plenty of options for investors to make their investments work harder for them.
Let’s take a look at two solid options with dividend yields currently around 3%: healthcare giant Merck (MRK 0.55%) and engine maker Cummins (CMI -0.01%).
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1. Merck
The first high-yielding stock to consider adding to your portfolio is Merck. The pharma company's current dividend yield is a market-trouncing 3.2% at its current $88 share price.
Potential investors can also be confident that Merck's dividend isn't a yield trap. That's because the stock's dividend payout ratio is expected to be about 38% in 2022. This gives the company ample capital to fund future acquisitions, repay debt, and repurchase shares to propel earnings higher in the years ahead. And it's why I am forecasting high-single-digit annual dividend growth over the medium term for the stock.
Merck also possesses an impressive product portfolio and drug pipeline. For instance, the company has a handful of blockbusters like the cancer drug Keytruda, human papillomavirus vaccine franchise Gardasil, and COVID-19 antiviral pill Lagevrio. Thanks to this top-notch product portfolio and a pipeline of 106 projects in late-stage clinical trials, analysts expect Merck to produce 12.2% annual earnings growth over the next five years.
Best of all, the stock is priced at a forward price-to-earnings (P/E) ratio of 11.9. This is well below the S&P 500 healthcare sector average of 15.9. That's why Merck appears to be a dirt cheap dividend stock to buy now.
2. Cummins
The other high-yielding stock to think about buying for your portfolio is the diesel- and gas-engine manufacturer Cummins. Its dividend yield is currently a market-topping 2.9%.
Trucks are responsible for moving nearly three-quarters (72%) of all goods consumed in the United States. The parts that Cummins manufactures and distributes to keep diesel trucks chugging along represent the glue that has been holding the U.S. supply chain (mostly) together throughout the COVID-19 pandemic.
And with Cummins heavily investing in new technologies like natural gas and electric-powered engines, it's a safe bet that the company's products will remain in demand for years to come. This helps to explain why analysts are anticipating Cummins will deliver 8.2% annual earnings growth through the next five years.
Investors can also sleep well at night knowing that Cummins' dividend is at a low risk of being cut, regardless of the economic environment. The stock's dividend payout ratio was just 38% in 2021, which allows Cummins to retain the needed capital to fund research and development, acquisitions, and share repurchases. This is why I think high-single-digit annual dividend increases are likely for the stock over the next several years.
The cherry on top is that Cummins is trading at a significant discount to its sector. Cummins' forward P/E ratio of 11.2 is far lower than the industrial sector forward P/E ratio of 18.1. For a stock of its quality, Cummins arguably deserves to be trading at a slight premium relative to its sector. That is what makes the stock a compelling buy for dividend-growth investors at this time.
