Some investors focus on price-to-earnings ratios when looking for cheap stocks. I prefer to look at dividend yield ranges, favoring companies that have historically high yields. Today Hormel (HRL -0.56%) and Clorox (CLX 0.67%) are both offering historically attractive yields that are backed by very impressive histories of annual dividend increases. If you are looking to buy a stock today, these two are among the cheapest stocks I own in the consumer staples space.

The sine curve

No business goes in a straight line up or down. There's always an ebb and flow to the progress. For long-term investors with a value bias, like me, the key is trying to find great companies that are likely to be temporarily out of favor on Wall Street. That's why my search starts with companies that have long histories of annual dividend increases. Ideally that would mean Dividend Kings, but I'll consider any company with over 10 years of hikes.

A person holding their face with a computer showing stock losses in the background.

Image source: Getty Images.

The next step is to find dividend companies with historically high yields. A few graphs tell me what I need to know, but a historically high yield alone isn't enough to make a stock a buy. Indeed, sometimes companies have high yields because there's a very real risk of a dividend cut.

So the third step is to dig into the story. On that score, I liked what I saw from food maker Hormel and more broadly diversified consumer staples company Clorox. That led to the fourth step of buying (multiple times in the case of Hormel).

Temporary problems

Hormel is probably the cheaper of the two stocks here, given that its 2.7% dividend yield is literally near the highest levels in the company's history. There's a good reason for Wall Street's dour mood, though. Other consumer staples companies have been doing a much better job of passing rising costs on to customers. That said, inflation is a normal part of business for a food company, and Hormel will eventually figure out how to restore its margins.

But that's not the only problem. Hormel has also been facing headwinds in its Jennie-O Turkey business because of the avian flu. There's not much the company can do with that other than work through the hit, which it is doing. The illness will eventually pass, as it has before.

There's still more, though. The recent acquisition of Planters has witnessed a soft patch after early turnaround success. It was a big acquisition, so investors are leery of trouble. However, Hormel bought it knowing that it had been left to wither by its former owner and, thus, would need a multi-year turnaround effort. It's still early days, so it's too soon to suggest that Planters is a failure given Hormel's long history of successfully managing notable brands like Skippy and SPAM.

Dividend King Hormel is cheap for a reason, but it looks like the issues are temporary.

Already turning things around

Clorox is another consumer staples company, but it has a much broader product range, from bleach to salad dressing. The pandemic threw a wrench in its business, because demand for cleaning products spiked and resulted in investors rushing into the stock.

When people stopped cleaning so much, Wall Street soured on the stock, pushing the shares sharply lower and the dividend yield up toward historically high levels -- around 2.8% today. Clorox has increased its dividend annually for 46 years, and there's no sign this streak is about to end. 

The big problem showed up in the fiscal second quarter of 2022, when Clorox reported a year-over-year margin decline of 12.4 percentage points. That's a huge drop, but management was fairly clear from the beginning that it was going to get margins back into growth mode over time.

A little over a year later, in the fiscal third quarter of 2023, margins grew 5.9% year over year. Margins are likely to move around, but it clearly looks like Clorox is doing exactly what it said it would do. Thus, the still historically high yield presents a buying opportunity. 

While there is more work to be done at Clorox, the success so far suggests the company is already moving in the right direction.

Harder and easier

From an investment perspective, it takes a lot more faith to buy Hormel today because it is still in the middle of a rough patch. But given its long history of success, it is probably worth giving the company the benefit of the doubt.

Clorox is already proving that it's fixing its problems, so there's less risk in the story. But that's also why the yield isn't quite as high as it was a year or so ago. Yet both of these consumer staples stocks remain attractively cheap for long-term dividend investors.