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 oriented toward the long term, 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.
Relative to its peers Wells Fargo came out of the Great Recession in far better shape, primarily because it wasn't tempted by derivatives and other highly risky investments and instead stuck to the basics of what makes it great: deposits and loans. With much of its mortgage litigation now in the rearview mirror investors have been able to focus on Wells Fargo's consistent and superior results.
In Wells Fargo's third-quarter earnings report, released in October, the company delivered net income growth of 3% as its efficiency ratio improved by 140 basis points to 57.7% (a lower number is better) and its return on assets came in at 1.4%. By comparison, Bank of America's and Citigroup's ROA are just a fraction of what Wells Fargo nets quarter after quarter.
In addition to improved headline numbers, Wells Fargo's loan portfolio showed significant credit quality improvement with net charge-offs falling to an annualized rate of just 0.32% from 0.48% in the year-ago quarter. This implies Wells Fargo may not need to set aside as much in the future for potential loan losses, resulting in better margins and beefier profits. Quarter-end loans also rose by 4% to $838.9 billion.
Long story short, Wells Fargo continues to simply execute on its deposit and loan strategy better than any of its peers. Sporting an S&P 500-topping 2.6% yield and a forward P/E of 12 I'd opine that this is a cheap dividend stock in the bank sector worth keeping high on your radar.
2. Seagate Technology (NASDAQ:STX)
In spite of a greater than 200% run higher in the S&P 500 since March 2009 you can still find cheap stocks in the technology sector, with hard-disk drive product developer Seagate Technology being a prime example.
What should an investor worry about when buying into Seagate? Primarily it's the cyclical nature of the tech sector as well as the ongoing commoditization of technology components. As processes become more efficient a company that simply sits back and fails to stay on the leading cusp of the innovation curve often sees its margins dwindle. The risk here would be pricing pressure on Seagate's products that leads to weaker margins.
Thankfully, I don't see this scenario occurring. The reason is storage space is the key to successfully running data centers and cloud networks for small and large businesses. Whether it's hard-disk drives, hybrids, or solid-state drives, Seagate's demand should remain intact as businesses look to move away from static hardware and into an environment where data can be shared and moved around with ease.
Seagate's quarterly result speaks to its ongoing success. In its first-quarter results, reported in October, Seagate grew its sales by 8% year over year to $3.79 billion, although its margins dipped a bit as the company boosted expenses related to researching new products. Still, based on Wall Street's projections Seagate is valued at a mere 11 times forward earnings.
Best of all, Seagate's multi-billion dollar share buybacks have allowed the company to pay a huge dividend. In October Seagate boosted its quarterly payout by 26% to $0.54 per share from $0.43. What's left is a superior yield of 3.3%. Cheap dividend stock investors take note!
3. General Motors (NYSE:GM)
Lastly, we'll end the week the way we began it: by highlighting a large holding within Warren Buffett's portfolio in GM.
It's pretty easy to see why General Motors is considered to be cheap right now with auto recalls in the U.S. hitting an all-time record last year. GM alone recalled more than 30 million vehicles in 2014 among 84 separate vehicle recall announcements. Speculation would be that the brands' reputation has been scarred and it's in danger of losing out on future customers because of its handling of the recalls.
As for me, I view these recalls as a short-term share price driver and would instead point to a number of reasons why GM could shine. For example, General Motors is ingrained in American history, and its designs are capable of evoking an emotional connection from grandparents to grandchildren alike. It's unlikely that GM will lose these customers for good considering that attachment.
We've also seen a heavy emphasis on redesigns and boosting fuel economy in recent years. The redesigned GMC Sierra and Chevrolet Silverado have been well-received by consumers, with the Silverado nearly hitting 530,000 units sold in 2014 and Sierra crossing the 200,000 unit sold mark and hitting 211,833.
At the moment GM is valued at just eight times next year's profit forecast, which is less than half the current cumulative P/E of the S&P 500, and it's on pace to pay out a 3.3% yield. As long as the U.S. economy remains on track GM's push into the Asia Pacific coupled with steady growth in U.S. markets should yield ample profit and dividend growth potential.
Sean Williams owns shares of Bank of America, but has no material interest in any other 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.
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