It took a little over two years, but we're finally in a bull market again. On Friday, Jan. 19, the S&P 500 index closed above the high-water mark it set in the early days of 2022.
Everyone's making a big deal about returning to a bull market because another year of positive returns seems inevitable. Not including the present recovery, the S&P 500 index has recovered from losing years nine times over the past five decades. There hasn't been a recovery that lasted less than two years, and the present recovery is only a little over one year old.
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With history saying this will be a good year for stocks, Wall Street and everyday investors have been driving them up to valuations that folks who focus on the numbers can't stomach. Luckily, there are still a handful of dividend-paying stocks that still look like bargains.
Dividend stock No. 1 trading at a low valuation: AT&T
Shares of AT&T (T 1.02%) did not participate in the S&P 500's rally and are down about 18.4% over the past 12 months. The price doesn't jive with the performance of its underlying business. Sales of mobile and broadband internet services are still rising steadily, and these are the sort of services that consumers and businesses rarely switch.
AT&T's 5G network covers around 200 million Americans and is driving profit growth. Mobility service revenue reached a record high in the third quarter of 2023.
AT&T's broadband business is growing even faster than its mobility business. In less than four years, its base of AT&T Fiber subscribers doubled to reach more than 8 million last year.
AT&T's broadband business could hit a much higher gear in 2024. The company recently launched a fixed wireless residential service, and its fiber business is on track to cover more than 30 million locations by the end of 2025.
Despite the strong performance of its telecom business, shares of AT&T have been trading for just 6.2 times trailing free cash flow. At recent prices, the stock offers a big 6.7% dividend yield. Its telecom business might not grow by leaps and bounds, but since it's one of just three large providers in the U.S., investors can reasonably expect steady movement in a positive direction.
Dividend stock No. 2 trading at a low valuation: UnitedHealth Group
UnitedHealth Group (UNH 0.30%) is another member of the S&P 500 index that hasn't contributed to its rally. The stock is down about 5% since the end of 2022 even though it's built a business that can reliably deliver increasing profits.
UnitedHealth Group collects monthly health insurance premiums from over 50 million people, but this isn't the only way it makes money. Its Optum Health segment served about 103 million people as of Sept. 30, 2023. With 90,000 employed or affiliated doctors, it's America's largest employer of physicians.
UnitedHealth Group delivered a 27% return on equity in 2023, but the stock market is focused on a spike in care use from seniors last year that drove its medical care ratio up to 85% in the fourth quarter.
UnitedHealth's medical care ratio worked out to 83.2% in 2023. That's higher than the previous year, but it really can't get much lower. Thanks to the Affordable Care Act, insurance companies have to give policyholders rebates if they spend less than 80% to 85% of premium dollars on medical care.
UnitedHealth offers investors a modest 1.5% dividend yield at recent prices, but don't let the low yield let you think this company isn't committed to sharing profits with investors. In 2023, it returned $14.8 billion to shareholders through dividends and a heap of share repurchases.
At the moment, you can scoop up shares of UnitedHealth for just 18.4 times trailing free cash flow. That's awfully low for an industry leader that has more than tripled its free cash flow over the past five years. Investors who bought at recent prices have a very good chance to realize market-beating gains over the long run.
