While most dividend-paying stocks cost more than $50, there are a few below this mark that investors should consider today.
With this in mind, Ally Financial (ALLY -0.07%), Sealed Air (SEE -0.57%), and Hormel Foods (HRL) fit the bill.
Let's explore why these businesses, home to rock-steady operations and well-funded dividends, make for great buy-and-hold investments.
1. Ally Financial
Ally Financial, the largest all-digital bank in the U.S., was originally the financing unit for General Motors before being spun off in 2014. It has 11 million customers and operates through two business segments: automotive and insurance, and Ally Bank.
With 7 million customers, the automotive and insurance unit accounted for more than 86% of Ally's 2022 revenue. But its fledgling banking unit has grown from 3% of revenue in 2014 to 14% today, with more than 4 million customers.
The banking segment is not yet a significant contributor to revenue, but it is crucial to Ally's success, holding more than $148 billion in deposits to help fund the company's lending operations. These deposits are crucial and they now account for 88% of funding, a far cry from the 41% mark of 2014.
This balance sheet transformation allowed Ally's net interest margin to widen from 2.5% in 2014 to 3.9% in 2022, thanks partly to a lower cost of funding. Furthermore, the banking segment's offerings -- credit cards, consumer lending, mortgages, and corporate financing -- diversify the company's vast pool of loans and now account for 23% of the total loan balance.
However, with the used car market slowing and interest rates spiking, Ally's sales and profits have dipped, and management thinks it may take until 2024 to rebound. The company's share price has dropped more than 35% in the past year due to these factors and fears of a potential mild recession looming.
After this drop, though, the company trades at some of the best valuations in the past five years.
ALLY PE ratio. Data source: YCharts.
Ally pays a dividend that yields 4.4% and has increased for six years; it is well covered, using only 20% of Ally's net income. So it should reward shareholders far into the future after a bumpy 2023. Its cheap valuation and hefty payouts make it an excellent dividend pick under $50.
2. Sealed Air
Sealed Air files an average of 185 U.S. and international patents annually, bringing innovation to the stodgy packaging industry. You might be surprised to learn that you probably know two of its brands: Cryovac and Bubble Wrap.
The company operates in two packaging segments, food and protective, and is undeniably steady, with customers spanning the food, e-commerce, and industrial markets. This diverse blend of clients and the company's must-have products makes Sealed Air relatively recession-proof, as evidenced by solid profitability in 2020.
However, the stock price is little changed for the past five years, prompting management to try to renew growth through its Reinvent SEE 2.0 plan.
This growth initiative is being led by Sealed Air's purchase of Liquibox for $1.15 billion, extending its reach into the fluids and liquids sector. This opens the company up to new growth areas, such as food-service packaging (juices in a recyclable bags and boxes, for example), and consumer-goods companies looking to avoid rigid plastic containers.
Sales in the company's automation line rose 24% in the fourth quarter of 2022 from a year earlier, versus a companywide sales decline of 8%. Although management expects 2023 to be another turbulent year due to supply chain issues, it expects the automation unit to post growth of 10% or more, and potentially doubling sales by 2027.
Management last year didn't increase the company's dividend, which yields 1.7%, but it did buy back $280 million in shares and still has more than $600 million authorized for repurchases, amounting to 9% of its market capitalization. Its price-to-earnings (P/E) ratio of only 14 is below its five-year averages, making the company a sound purchase for dividend investors.
3. Hormel Foods
Hormel is home to more than 40 brands that are either No. 1 or No. 2 in their respective categories, giving Sealed Air a run for its money in terms of being recession-proof. Its brands include Skippy peanut butter, Jennie-O turkey products, Wholly Guacamole, Hormel pepperoni, and the more recently acquired Planters peanuts.
But reduced pork availability and the highly pathogenic avian influenza's impact on its turkey supply caused a 2% and 9% drop, respectively, in sales and earnings per share (EPS) in its fiscal 2023 first quarter ended Jan. 29. Worse, its $3.35 billion acquisition of Planters from Kraft Heinz in 2021 weighed the company down, since it is not yet fully integrated to its fullest potential.
At the time of the report, Chief Executive Officer Jim Snee said, "... after almost three years of chasing unprecedented demand, our ability to supply our customers, consumers and operators caught up to and, in some cases, began to exceed demand, and we needed to react sooner." Following the latest earnings report, the shares dropped and recently traded 29% lower than their 52-week highs.
However, Hormel has averaged a return on invested capital (ROIC) of 15% over the past decade before declining to 9% in 2022 due to the added debt from the Planters acquisition. ROIC measures a company's profitability compared to its debt and equity, with Hormel's 15% average being the best among its packaged-food peers.
Furthermore, Hormel pays a well-funded dividend, now yielding 2.8%, that the company has increased for 21 years straight. Hormel trades at a P/E of 22, its lowest since the 2020 crash, making it an excellent rebound pick as it move past recent challenges.
