Dividend stocks are the cornerstone of many well-run retirement portfolios -- that's a fact. The reason is that dividend stocks act as a beacon to investors, inviting them to take a deeper look into a company whose business model is so sound it can pay out a percentage of its annual profits on a regular basis to its investors.
Further, dividends can provide a downside hedge in volatile and bear markets. Investors in dividend stocks tend to be more long-term-oriented, which usually means far less day-trading and volatility.
Lastly, dividends can be reinvested, giving the buyer a chance to compound their gains over the long run. These payouts can mean the difference between simply retiring and retiring the way you've always dreamed.
With that in mind, let's have a look at three cheap dividend stocks you can consider buying right now.
1. Johnson & Johnson (NYSE:JNJ)
If you're looking for substantial dividend income with relatively low risk in the healthcare sector, then Johnson & Johnson might be the stock for you.
Johnson & Johnson offers a nice balance of pricing power and business diversity that helps investors sleep peacefully at night while also angling the company for years of steady growth. For example, Johnson & Johnson's consumer products division is slow-growing, but its brand-name-laden product portfolio is buoyed by steady demand and healthy pricing power. On the flip side, J&J's pharmaceutical segment is growing like a weed. Since 2009, it has introduced 14 new products that have generated $12.5 billion in cumulative sales (through Q2 2014). Furthermore, juicy margins from its pharmaceutical business continue to propel J&J's profits higher.
Although this is certainly up for argument, I suspect Johnson & Johnson's growth throughout the remainder of the decade will come from its pharmaceutical business. The Affordable Care Act should wind up boosting its medical-device and diagnostic business within a few years once certainty regarding medical spending has improved, but for the time being, it's drug development or bust for J&J's profits.
The good news is that the chances that J&J's pipeline will "bust" are pretty slim. The launches of blood cancer drug Imbruvica, and Invokana, a revolutionary SGLT2 inhibitor designed to treat type 2 diabetes, should fuel growth. Imbruvica could wind up being approved for a number of new indications and is forecast to deliver peak annual sales of up to $9 billion. Invokana, on the other hand, is expected to crest $2 billion in peak annual sales by the end of the decade.
Johnson & Johnson is currently riding a 52-year streak of increased dividend payments and pays out an S&P 500-beating 2.6% yield. So long as its pharmaceutical business keeps growing, there's little reason to believe its P/E of 17 isn't a bargain.
2. American Eagle Outfitters (NYSE:AEO)
Compared to J&J, teen retailer American Eagle Outfitters probably looks like a disaster -- and, to some extent, it is.
Last year was unkind to teen retailers, which were forced to steeply discount during the back-to-school season and faced competition from larger department stores luring in teen customers and their parents with discounts and loyalty rewards. American Eagle Outfitters was no exception, lowering its profit projections on a number of occasions. For instance, in the third quarter, American Eagle Outfitters noted that comparable-store sales dipped 5%, on par with last year's 5% decline.
However, American Eagle has a good track record of being proactive with its inventory and has often rebounded from teen-retail hiccups more quickly than its peers. American Eagle Outfitters has restructured its operations to reduce its expenses, and it has moved much of its excess inventory -- inventory declined by 10% year over year in Q3 -- out of its stores, which should immediately improve margins. It's also working on bolstering its high-growth direct-to-consumer operations.
Most importantly, I believe American Eagle Outfitters sits in an advantageous price niche that allows it to attract teens and their parents (who usually handle all the purchases). Abercrombie & Fitch's premium pricing and Aeropostale's lack of real branding leave a lot to be desired. Further, while department stores have been somewhat successful in luring in teen customers, they'll never have the branding capacity a company like American Eagle Outfitters can offer.
American Eagle Outfitters' current yield of 3.9% dwarfs the S&P 500 average, and its aggressive turnaround plan should pay off sooner rather than later. In other words, it's a cheap dividend stock that I'm a big fan of, and I'd suggest you add it to your watchlist as well.
3. Exelon (NYSE:EXC)
Finally, I'll turn your attention to the utility sector. Let's take a closer look at why Exelon could be a cheap dividend stock you'll want in your portfolio.
There are plenty of reasons to be skeptical of Exelon heading into the new year, considering utilities were the best-performing sector last year. A repeat would be somewhat unexpected for a relatively slow-moving sector. Further, Exelon has a power-generating portfolio filled with nuclear facilities. When coal and natural-gas prices are high, these nuclear facilities are cost-competitive, but the moment, nuclear costs are putting Exelon at a disadvantage to its peers.
However, I see plenty of reasons to be excited about Exelon's prospects. The company's purchase of Pepco Holdings (NYSE:POM), a mid-Atlantic electric company, should prove to be a big boost to Exelon's bottom line. Pepco's businesses are regulated, meaning a greater portion of Exelon's energy portfolio will now be regulated and thus predictable. Wall Street and investors much prefer predictable cash flow that isn't exposed to fluctuating wholesale energy prices, so this should be a move that boosts Exelon's profitability over the long run.
I also believe the U.S. government will look for ways to boost its use of nuclear power via a subsidy. This idea isn't new, and it has been discussed previously, but the need for cleaner energy sources is readily apparent. Exelon's leading nuclear facilities could be a big beneficiary of shifting laws that emphasize the use of nuclear power.
Exelon is also attractive from a valuation perspective. Its forward P/E of just 15 and its dividend yield of 3.5% compare favorably to S&P averages. Best of all, Exelon's low beta, which is a function of the fact that it sells a basic-need service (electricity), will allow investors to sleep well at night.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Johnson & Johnson. It also recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.