Contrarian value investing isn't for the faint of heart. In fact, Wall Street has a saying for investors: "Don't try to catch a falling knife."
The phrase refers to the attempts value investors sometimes make as they try to add value to their portfolios. They go after stocks hated by the market in an attempt to increase returns on a rebound and reduce risk by buying at better value prices. But in doing so, they can end up with steeper and steeper losses as stocks can continue falling.
This article is not focused on "falling knife" prospects. But it will discuss how Kraft Heinz (KHC -3.05%) and Winnebago Industries (WGO -5.55%) are brilliant dividend stocks trading at massive discounts worthy of consideration. Read on to learn more.
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Kraft Heinz: High yield at a big discount
Just over a decade ago, Kraft merged with Heinz to create one of North America's largest food and beverage manufacturers. The combined packaged foods giant boasts dozens of brands beyond its namesakes, including Oscar Mayer, Velveeta, Philadelphia cream cheese, Kool-Aid, Capri-Sun, Cool Whip, A-1, and more. It's a global powerhouse with products sold in more than 190 countries and territories.
While Kraft Heinz has felt the impact of a tightening consumer spend, its strategic path forward should have long-term positive impacts. Essentially, since mid-2019, the packaged goods company has prioritized category management and e-commerce, as well as elevated brand spending (marketing) and product innovation. In fact, innovation accounted for roughly 3% of sales in fiscal 2024, which was almost double the level in 2022, and management expects another $2 billion of incremental net sales from new products by the end of fiscal 2027.
Further, Kraft Heinz generated $1.7 billion in savings on its stated path to a total of $2.5 billion by the end of fiscal 2027. But this strategic move isn't to support margins. It's to free up resources to invest in its product mix and innovation -- which remains a key for the company moving forward.
In addition to focusing on product innovation and cost-cutting, Kraft Heinz substantially improved its financial flexibility over the past few years. It gained a substantial debt load after the merger in 2015, but was able to prioritize debt repayment since mid-2019, with a chunk directed at debt reduction from the divestiture of its natural cheese business and the Planters brand.
And yet, after all these efforts to get the combined company into financial order, it recently announced that it plans to split into two companies sometime in the second half of 2026.
Kraft Heinz still faces challenges stemming from inflation that has yet to abate, tempered consumer spending, and added costs associated with improving the health profile of its products. The company trades at a staggering 48% discount to Morningstar's price-to-fair-value target of $51 per share. Investors would be wise to temper expectations from the company's decision to separate its business into two independent publicly traded companies: sauces, spreads, and seasonings, and North American grocery.
Ultimately, given the substantial discount the stock trades at while offering investors a robust 6% dividend yield, it might be time to start a small position in this dividend stock. It has a renewed focus on product innovation, a significant cost-savings program, and the future split will give investors now access to what will likely be two growing companies.
Winnebago Industries: An evolution through the decades
Winnebago Industries has significantly evolved since beginning recreational vehicle production in 1958. Winnebago manufactures Class A, B, and C motor homes, and expanded into towables in 2011 with the acquisition of SunnyBrook, with Grand Design following in 2016. It also dipped its toes into boating in 2018 with the purchase of Chris-Craft, and in 2021 with the acquisition of Barletta and its pontoon boats.
Image source: Getty Images.
There are a couple of factors that make Winnebago an intriguing stock. First, the company has been accelerating the value it returns to shareholders via its dividend over the past five years, as you can see in the chart below.
Data by YCharts.
Further, keep in mind that one of those large dividend increases came during the pandemic, and more large increases since then are good signs of financial health and confidence in the business.
Second, Winnebago has upside between leaner manufacturing and potential market share gains. More specifically, Winnebago is now not manufacturing a unit until it has a firm order, which should mean less discounting and more profitable sales. And while the company owns about 10% of North American towables market share, the top two competitors own roughly 80% market share combined -- leaving plenty of room for growth if management executes on price and compelling products.
Lastly, despite its challenges and lack of durable competitive advantages, Winnebago offers investors a robust 4.1% dividend yield and is trading at a roughly 55% discount to Morningstar's fair value estimate of $75 per share.
What it all means
Both Kraft Heinz and Winnebago have trailed the broader S&P 500 over the past three years and certainly face their own challenges in competitive industries. It may not be an easy road or one quickly traveled, but both companies also have a future that, in Kraft Heinz's case, could be more focused after a company split, and in Winnebago's case, could have lucrative international expansion. At these discounts and with these high dividend yields, it may be time for investors to take a closer look and consider opening a small position.
