Dividend stocks often deliver market-beating returns over long periods of time. However, their quarterly distribution isn't the core reason underlying this trend. Rather, the real driver is their core value proposition as cash-flow-positive companies with well-established businesses and entrenched competitive positions. Nonetheless, most dividend stocks haven't been market-beating vehicles this year due to a host of marketwide structural issues, potentially creating a compelling buying opportunity for contrarian investors. 

Which underperforming dividend stocks might be worth loading up on right now? Telecom stalwart AT&T (T -2.00%) and medical device giant Medtronic (MDT 0.57%) both offer investors above-average yields, underappreciated economies of scale, and attractive valuations. Here's why it might be high time to buy these two deeply undervalued dividend stocks

Rolls of U.S. dollars arranged in a pattern indicating growth.

Image source: Getty Images.

1. AT&T: The light at the end of the tunnel

AT&T stock has badly underperformed the broader market this year (see chart below). Its high debt load, declining growth in the postpaid phone customer segment, the enormous capital outlay for its fiber and 5G network builds, its pivot back to telecom after an ill-conceived move into media, and free-cash-flow generation concerns have all weighed on the company's shares in 2023. 

AT&T, though, appears to be poised for a turnaround for several reasons. Thanks to a suite of tailwinds, such as shrinking costs, strong customer loyalty, gradual debt reduction, and a more price-stable telecom market, the narrative around its stock could improve dramatically within the next four to six months. 

Perhaps most importantly, though, AT&T now expects to exceed its prior $16 billion free cash flow figure for the year. Moreover, most analysts anticipate the company's profit margins will inch higher in 2024 due to a favorable mix of lower costs and further price stabilization within the U.S. telecom market.

In all, AT&T stock offers a compelling value proposition with its exceptionally high yield of 7.27% and its rock-bottom valuation (6.1 times projected earnings). While this telecom stock may not outperform the broader market on a consistent basis over the next five years, it should generate solid income and earnings growth over this period.

2. Medtronic: An out-of-favor medical device juggernaut

Medtronic is a pure-play medical device company. It earns money through four distinct segments: Cardiovascular, Neuroscience, Medical Surgical, and Diabetes. In its fiscal first quarter of 2024, Medtronic reported strong organic sales growth across all four units, fueled by new product launches and robust demand across its varied portfolio. Even so, the medtech giant's shares are presently on a multiyear losing streak, thanks to the company's anemic revenue growth over the prior five-year period. 

MDT Chart

MDT data by YCharts.

Medtronic, though, has a plan to change this situation. The company is in the process of carving out two underperforming units, and its highly innovative pipeline should yield multiple growth drivers in the coming decade.

On the value side of the ledger, Medtronic's stock is currently trading at a multiyear low from a projected earnings standpoint:

MDT PE Ratio (Forward) Chart

MDT P/E Ratio (Forward) data by YCharts.

Its shares also pay an above-average 3.94% annualized dividend yield, and the company has a 46-year track record of dividend raises. With cost-cutting and rising revenues expected to lift its free cash flow in 2024 and beyond, Medtronic's dividend screens as safe.

The bottom line is Medtronic is firmly on the comeback trail, making it an attractive play for income and value investors alike.