The first half of 2023 was a tremendous one for growth stock investors. Fortunately for income-seeking investors, dividend-paying stocks haven't been getting nearly as much positive attention. Some have even been beaten down to valuations that appear too low.
Buying top dividend stocks on the dips is a strategy that can lead to heaps of passive income during your retirement. Of course, this strategy falls apart if earnings for the underlying businesses don't grow faster than the inflation rate.
Before getting too excited about these seemingly underpriced dividend stocks, let's look under the hood to see if they're bargains now, or if they've been beaten down for good reasons.
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Viatris: a 4.9% yield
Viatris (VTRS 0.87%) is a generic-drug maker formed in 2020, when Pfizer merged its operating segment that sold Lipitor, Viagra, and other famous off-patent brands, with Mylan, the generic-drug manufacturer famous for EpiPen.
Shares of Viatris rallied shortly after the merger, but the stock has fallen 78% from the peak it reached over two and a half years ago. Now, investors can buy this beaten-down stock for just 3.3 times forward-looking earnings expectations.
Viatris reported first-quarter sales that dropped 11% year over year, or 2% after accounting for recent divestitures. Generic-drug prices decline rapidly with every competing company that launches one. Viatris has already filed applications for eight first-to-market opportunities that could lead to over $1 billion in annual sales in 2027.
An army of technical writers that can rapidly complete new applications and a large global salesforce are significant competitive advantages. Unfortunately, they aren't strong enough to make Viatris a compelling long-term investment. It's probably best to wait for clear signs this company can grow before adding any shares to your portfolio.
CVS Health: a 3.5% yield
CVS Health (CVS -0.22%) is famous for having America's largest chain of retail pharmacies, but this is actually a minor part of its overall business. These days, its largest growth driver is Aetna, the health insurance benefits management business it acquired for $78 billion in 2018.
CVS froze its quarterly dividend payment in place for a few years to pay down the debt it took on to acquire Aetna. It raised its payout by 10% in 2022 and another 10% this year. Its unique collection of businesses that support Aetna gives investors a good chance to see more raises at double-digit percentages in the years to come.
CVS Health also benefits from a long-running secular trend. The national health expenditure reached $4.3 trillion in 2021, and it's expected to rise by 5.4% annually through 2031. Many of the providers who direct the flow of those trillions are now CVS Health employees. This March, the company acquired Signify Health, a value-based care provider with over 10,000 clinicians spread throughout all 50 states.
As one of the largest employers of physicians in America CVS Health has a leg up on most insurers that can only send their members to third parties. Strong competitive advantages and America's ever-increasing need for more healthcare services should make outpacing inflation a breeze for this stock.
A recent drop in the star ratings the government gives CVS Health's Medicare Advantage plans could shave $1 billion off from topline revenue this year. As a result, the stock has fallen to just 8 times forward earnings expectations. Scooping up some shares at this very reasonable valuation looks like a great idea.
Truist Financial: a 6.5% yield
Shares of Truist Financial (TFC 0.53%) have declined about 26% this year. The beatdown occurred largely in response to the regional banking crisis in March, followed by a first-quarter earnings miss.
Truist missed earnings because its costs of capital are rising faster than Wall Street was expecting. Net interest income, which is the difference between interest received and interest paid, rose 22% year over year, but it declined by 2.8% compared to the fourth quarter.
It's been months since smaller challenger banks started offering savers more than 4% on federally insured deposits. It should be no surprise that Truist's average cost of deposits rose 0.46% in the first quarter to 1.12%, but the news caught the stock market off guard.
The beating that Truist's stock price has taken this year has probably gone too far. Shares are trading for just 0.76 times the bank's book value. That's extremely low for a bank that's delivered a 10.04% average return on equity over the past five years.
Lots of earnings growth might not be in the cards for Truist this year, but it's still originating new loans at higher interest rates. Its bottom line could return to growth in 2024 as long as the Federal Reserve doesn't become far more hawkish in the quarters ahead. Putting some shares in a diversified portfolio now looks like a smart move.
