A good way to maximize your potential returns is by focusing on cheap stocks that also pay dividends. That way, you collect a recurring payout while also setting yourself up for some attractive profits down the road. Three stocks that tick off both checkmarks for investors are Verizon Communications (VZ +1.48%), Cisco Systems (CSCO +0.58%), and AbbVie (ABBV 2.51%).
1. Verizon Communications
Verizon has been a tough investment to be holding in recent years. Down more than 20% year to date, the stock is on track to potentially do even worse than in 2022 when its shares nosedived by 24%. And the year before that, it was also down 12%. At some point, however, enough becomes enough and the stock is due for a rally.
NYSE: VZ
Key Data Points
That time could be coming soon, because while growth stocks have been hot buys this year due to artificial intelligence (AI), there could be worse economic conditions on the way. And as investors look for safety, they might opt for a dividend stock such as Verizon, which despite the bearishness over the past few years still has a robust and highly profitable telecom business.
At close to 50% of earnings, Verizon's payout ratio is fairly modest, suggesting that the stock's dividend, which yields 8.6%, isn't in any imminent danger.
Cleaning up lead-covered cables does create a potential liability for the telecom company down the road, but that may take years to sort out, and it's not enough of a reason to stay this bearish on what's still a quality business -- Verizon has generated more than $20 billion in profit in each of the past two years. And this year, it's projecting between 2.5% and 4.5% growth in its core wireless service business.
Trading at less than 7 times its estimated future profits and offering a high yield, Verizon has the potential to be a steal of a deal for long-term investors.
2. Cisco Systems
Cisco is a big name in tech, known for its routers and networking products. Its operations are also highly profitable, with the company posting an impressive 22% profit margin over the trailing 12 months. And it recently bolstered its growth prospects with a $28 billion acquisition of Splunk, an analytics business that can help Cisco's customers not only manage threats but prevent them from taking place.
NASDAQ: CSCO
Key Data Points
But despite the more positive outlook, this is still a stock that trades at a fairly low valuation; Cisco's forward price-to-earnings multiple is just 13. By comparison, the S&P 500 average is 19.
Typically, shares of a company fall following an acquisition, which is what is happening with Cisco right now, as investors aren't usually on board with a huge outflow of cash and can sometimes question the price tag. But in the long run, there's potential for Cisco's recent acquisition to pay off in droves, which is why this can be a great time to buy the stock.
Cisco also pays a relatively high dividend, which yields 2.9% -- that's higher than the S&P 500 average of 1.6%. And with a payout ratio of around 50%, this makes for another good dividend stock to buy and hold.
3. AbbVie
A third high-yielding dividend stock that looks cheap right now is AbbVie. The pharmaceutical company is trading at less than 14 times its estimated future earnings.
Investors are hesitant to buy shares of the company as AbbVie expects its top drug, Humira, to see a drop of 35% in revenue this year due to an increase in competition with several biosimilars becoming available and providing patients with cheaper options.
NYSE: ABBV
Key Data Points
It's not a great situation for the company, but in the long run things should improve as AbbVie has a couple of promising assets in Rinvoq and Skyrizi, which are immunology treatments that the company believes can combine for higher peak sales than Humira.
AbbVie is trading at a riskier valuation than it deserves, which presents investors with a great investment opportunity today.
The stock also provides investors with a great dividend, which yields 4%. While its payout ratio may seem high at over 100%, that's not indicative of the dividend's safety, as over the trailing 12 months AbbVie has generated free cash flow of $24.8 billion, and its cash dividend has totaled just $10.3 billion in that stretch.
For dividend investors, this can make for an underrated income stock to buy right now.
