One of the lessons you learn early on as an investor is that there is no one-size-fits-all approach to investing. Individual investors have varying investment goals, risk tolerance levels, and so forth. Some of these strategies are successful, some just tread water, and some are doomed to failure.
If you want an (almost) foolproof method of successful stock ownership, the dividend growth investing strategy can be a good fit. It requires you to remain focused on the fundamentals of your investments, and it relies on the growing passive income you get rather than on short-term share price movements. If you can buy in on these types of stocks while they are undervalued, you can also benefit from better yields and some price appreciation.
Let's look at a trio of arguably undervalued income stocks that currently sport 3%-plus dividend yields. These are dirt-cheap dividend stocks that beginners and seasoned investors alike should consider adding to their portfolios.
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1. Philip Morris International: The 800-pound gorilla of the tobacco industry
Owning five of the world's top 15 cigarette brands and the leading reduced-risk nicotine product Iqos, Philip Morris International (PM 2.82%) is the biggest tobacco company in the world. As measured by market capitalization, Philip Morris International is more than one-third larger ($140 billion vs. $80 billion) than its next largest peer, Altria Group.
As more smokers are informed about and turn to nicotine products that could be less harmful than traditional cigarettes, nobody will benefit as much as Philip Morris International. This is why analysts believe that the company's earnings will grow by 7.4% annually over the next five years.
This level of earnings growth combined with a 5.6% dividend yield that is almost quadruple the S&P 500 index's 1.6% average yield makes Philip Morris International an interesting investment candidate for income investors. That's especially the case considering that the dividend payout ratio is expected to come in at around 82% in 2023. Sealing the deal to make the stock a buy for income investors, Philip Morris International is trading at a lowly forward price-to-earnings ratio of 13.1 -- moderately below the tobacco industry average forward P/E ratio of 14.5.
2. Darden Restaurants: Full-service restaurant brands that are loved by guests
With eight full-service restaurant brands under its umbrella, including Olive Garden and LongHorn Steakhouse, Darden Restaurants (DRI 0.14%) operates nearly 2,000 restaurants. The variety of restaurant brands it operates means it has a better chance to satisfy the taste preferences of just about anybody.
In a business environment where experiences are valued over material possessions by most consumers, Darden shines through with the service that it provides to its guests. This is probably why analysts believe that the company's earnings will rise by 9.1% each year over the next five years.
Darden's 3% dividend yield also appears to be well-covered; the dividend payout ratio is expected to be approximately 61% for the fiscal year that ended in May. And dividend investors can buy the stock at a forward P/E ratio of just 18.3. Putting this into perspective, that is well under the restaurant industry's average forward P/E ratio of 23.5.
3. American Tower: The world can't live without this REIT
If you're like most people, you probably use your smartphone numerous times daily. And you have the likes of American Tower (AMT 0.17%) to thank for your ability to do so. The real estate investment trust's (REIT's) 226,000 communications assets (cell towers, distributed antenna systems, and data centers) make it possible for telecom companies to provide cell service and data to customers.
As more individuals around the world possess smartphones and use more wireless data, American Tower's infrastructure will only become more important over time. This is what gives the REIT the confidence to target 10% dividend per share growth in 2023. On top of its 3.5% dividend yield, this is a rare mix of income and growth potential.
The cherry on top is that American Tower stock can be acquired at a price to adjusted funds from operations (AFFO) per share ratio of 19.1. From my vantage point, that's a cheap valuation for a business poised for strong future growth.
