In a wobbly economic environment, dividend stocks tend to be seen as safe havens. That's because income (cash flow) becomes more valuable when there are few growth prospects, and purchasing power needs to be preserved. In the unusual current market environment, though, the specter of economic weakness is dragging a bunch of dividend stocks down just as much as it's upending growth stocks. What gives?
Blame soaring inflation, mostly. It prompts higher interest rates and yields, and the easiest, fastest way to pump up a stock's dividend yield is by lowering its price. Most companies can't raise their dividend payouts aggressively enough to offset the full impact of recent interest rate hikes. As is so often the case, though, the market has moved too far and too fast in devaluing some dividend payers.
Here's a rundown of three cheap dividend stocks to buy because the sellers overshot their target and made the stock for some otherwise solid companies cheap.
1. Ford Motor Company
Dividend yield: 3.4%
To many investors, Ford Motor Company (F 0.83%) is an "old Detroit" relic -- an automotive icon that's losing its slow battle with irrelevancy. Globalization and the advent of electric vehicles (EVs) have been so tough on the company, in fact, that its typical revenue and operating profits now are more or less in line with its top and bottom lines from the late 1990s.
Just when it looked like a new-and-improved, EV-powered Ford might finally emerge from the shell of the former company, disaster struck. The pandemic not only disrupted supply chains, but it also discouraged many consumers from buying a new car as well. In early 2020, Ford was forced to suspend the payment of its quarterly dividend that had been steadily growing since it was restored in 2012. It was resumed late last year, but only at about two-thirds of its previous level, and without supply chain problems being fully fixed.
Given all of this, the stock's most recent weakness makes a lot of sense.
As hockey great Wayne Gretzky put it, though, "I skate to where the puck is going, not where it has been." For investors, this just means worrying more about a company's future than its past.
Ford isn't just dabbling in the EV business. Its Mustang Mach-E is Consumer Reports' favorite EV of 2022, its all-electric Lightning F-150 pickup truck has a lengthy waitlist, and the company is aiming for up to half of its production to be EVs by 2030.
Most important to income investors, last year's adjusted per-share profit of $1.59 easily covers the current annualized payout of $0.40 per share, leaving room for future payment increases as well. For more bullish perspective, analysts expect Ford to earn $1.93 per share this year, en route to $2.16 next year.
You can plug into this revitalized Ford while the stock is priced at only 4.2 times its trailing-12-month earnings, which leaves little room for further downside.
2. LyondellBasell
Dividend yield: 4.6%
While the recent wave of inflation has been bullish for stocks of commodity companies leveraging their newfound pricing power, shares of chemical company LyondellBasell (LYB 0.85%) aren't participating in the rally. After the pullback from May's highs, in fact, LyondellBasell stock is trading right around where it was in early 2021, which is where it was priced in 2017, and near the stock's price all the way back in 2014.
Income-minded investors don't need to be too worried about this lack of progress, though. The company's doing its part; per-share profits are about 50% better now than they were then. The market's just not rewarding the stock, perhaps fearing the eventual end to this round of inflation will take a toll on LyondellBasell and its oil-refining chemical business in particular.
This misunderstanding is your opportunity to step into a dividend stock that's not only yielding 4.6% but also trading at a trailing price-to-earnings (P/E) ratio of only 5.6. For comparison, the S&P 500's current trailing-12-month P/E is still considerably higher at 21.5, according to data from Birinyi Associates. And that's despite the market's big pullback since the end of last year.
Don't misunderstand. The Fed's planned rate hikes will cool inflation sooner or later, driving commodity prices lower. LyondellBasell won't evade this headwind. But the stock's price already more than reflects this future headwind, which might be overestimated anyway. Most of this company's products -- like industrial plastics; polymers; catalysts; and equipment used by customers including refiners, food producers, and consumer goods makers -- are in demand regardless of the economy's condition.
3. Prudential Financial
Dividend yield: 5.1%
Finally, add life insurer Prudential Financial (PRU 1.11%) to your list of cheap dividend stocks to consider. Although it performed reasonably well in 2021, it never exactly soared to a lofty valuation, allowing the 20% pullback from April's peak to pump up the dividend yield to 5.1% and drive the trailing P/E down to 7.7.
The doubts driving the selling are understandable. Things have been tough for investors since the beginning of the year, but they took a decided turn for the worse just a couple of months back. It's easy to think insurance and investing (which Prudential also offers) are suddenly going to be seen by consumers and companies as optional rather than necessary. A weak economy and stock market also make it tough for insurers to fully cover their required payouts; they often invest their pooled funds in equities as well.
In reality, though, the insurance business is far more resilient than this stock's recent pullback suggests, snapping back from profit stumbles pretty quickly.
PRU normalized diluted EPS (quarterly). Data by YCharts.
While a tepid economy is a problem, to be sure, the graphic above illustrates it's a problem that can be fixed in short order. Insurance premiums are readjusted every year to reflect the environment at the time. While 2022 is clearly going to be plagued by many unknowns, most of them should be reflected in 2023's pricing.
Sure, some customers could cancel their coverage due to price increases, and Prudential's investing and retirement planning operation might run into sizable challenges. Most customers will keep their insurance coverage and investment plans in place, though, knowing it makes good financial sense to do so even if it's not easy at the time.
