Value investing and dividend investing are time-honored investment strategies. And these two disciplines are not mutually exclusive.
Many value stocks are also dividend stocks, and vice versa -- and combining these two approaches gives investors multiple ways to win. Value stocks with a discounted valuation could provide some upside when the market comes to appreciate them. Meanwhile, the dividend payments provide a steady stream of passive income -- and perhaps some downside protection in a turbulent market.
With the market's sell-off in 2022, there are plenty of good stocks trading at incredibly cheap valuations and offering compelling dividend yields. Here are three that you may want to consider now.
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1. Foot Locker
Foot Locker (FL 1.53%) has struggled over the last few years as mall-based retailers have fallen out of favor with investors. But there's reason for optimism as new CEO Mary Dillon (former head of Ulta Beauty) comes in and attempts to spark a turnaround.
Under Dillon's leadership, Ulta Beauty increased e-commerce revenue from 4% to 30%, so there is reason for optimism that she can lead Foot Locker's transformation from a brick-and-mortar retailer to more of an omnichannel company. During Dillon's tenure, Ulta Beauty's market value almost tripled. As they say, past performance is no guarantee of future success, but it looks like the right person is in charge now.
One note of caution for dividend investors is that Foot Locker paused its payout for one quarter during the COVID-19 pandemic in 2020, and the company resumed dividend payments at a reduced rate the next quarter. However, this was a unique circumstance and a trying time for many businesses, and Foot Locker has now quickly ramped up the dividend payment back to where it was in the pandemic's early days.
With a bargain bin price-to-earnings multiple of 6.5, a dividend yield of nearly 5%, and a new CEO with an impressive track record ready to make her mark on the company, Foot Locker looks like an excellent dividend stock to buy.
2. Ally Financial
Ally Financial (ALLY 0.59%) is an online bank with a large presence in the auto lending industry. It also offers mortgages, consumer banking, credit cards, and more.
The shares are down over 46% year to date as investors worry about the lender's large exposure to auto lending. Investors have reason for concern as charge-offs (debt unlikely to be collected) in Ally's retail auto loan business nearly doubled during the most recent quarter. On the other hand, it's not all bad news -- demand for auto lending looks strong as Ally originated $12.3 billion in consumer auto loans, the highest total for a third quarter since 2006.
New auto loans are now pricing above 9%, making them an attractive proposition that can weather some losses. Ally also has $3.6 billion set aside in reserves to offset future losses, putting it in a strong position. Furthermore, Ally's consumer banking business is firing on all cylinders -- Ally has grown its customer count for 54 straight quarters and its deposits are increasing.
Value investing is sometimes described as "trying to buy a $100 bill for $80," a deal most people would take every time, and that's essentially what investors are getting with Ally Financial right now. This is because Ally Financial trades at a price-to-book ratio of under 0.8. That's 20% below what the company's assets would be worth if it were to be liquidated today. Ally also looks attractive on an earnings basis with a price-to-earnings multiple of under 5.
Finally, the stock also offers an attractive dividend payout with a yield of 4.3%. Ally has tripled its annual dividend payout since 2017 to $1.20. Ally is a decidedly inexpensive stock trading at a significant discount to book value that pays a significant and growing dividend, which should be a winning combination.
3. Franchise Group
Finally, Franchise Group (FRG) is another incredibly cheap stock that yields even more than Foot Locker or Ally. Its shares trade at just over 5 times earnings and the yield is an eye-popping 10%, more than 4 times the average yield for the S&P 500.
The company is a franchisor of a wide variety of businesses, including The Vitamin Shoppe, Sylvan Learning, Pet Supplies Plus, a variety of furniture stores, and more. Franchise Group makes steady, recurring revenue from the royalty fees paid by its franchisees.
The wide variety of businesses in a disparate group of industries also gives Franchise Group (and its dividend) plenty of diversification and shields it from the downside of one business or segment struggling -- no one business is responsible for more than 29% of Franchise Group's earnings.
Still, Franchise Group is down 55% year to date due to fears that a deteriorating economy will pose challenges to the furniture business. The stock was hammered for missing bottom-line estimates during the third quarter, which it attributed to "poor execution" at its American Freight business. CEO Brian Kahn says that the company "paid too much" for the "wrong inventory, which led to the need for heavy discounting.
However, over the long term, Kahn is confident that American Freight will not only rebound but can also become Franchise Group's most valuable business and that it has a lot of room for growth ahead. The company also hired a new CEO to run its new Home Furnishings Division (which includes American Freight, Buddy's Home Furnishings and W.S. Badcock), which seems like a step in the right direction.
Franchise Group's 10% yield isn't simply the result of the stock price falling. The company has ramped up its annual dividend payout aggressively since 2020 from $1 a share to $2.50 per share today. Additionally, management is supplementing its returns to shareholders with an aggressive $500 million share buyback plan.
Dividend investing and value investing are both winning strategies in the market. Combining the two gives investors even more ways to win -- you can buy shares at attractive valuations and hold over the long term while the market comes around to them, and receive significant dividend payments in the meantime.
