Dividend stocks are the cornerstone of many well-run retirement portfolios -- that's a fact. The reason is that dividends 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 should consider buying right now.
1. Cisco Systems (NASDAQ:CSCO)
Information technology giant Cisco Systems may only have been paying a dividend for four years, but it's quickly developing into an investment that income investors can trust.
Cisco Systems' primary calling card to success is the company's push into the Internet of Things. Cisco realizes the value of moving beyond static networks and into the cloud, and has been spending heavily on developing the infrastructure capable of operating in the cloud. This includes clouds for businesses as well as residential consumers, who might soon find more of their everyday items connected, such as their car, home thermostat, and refrigerator, for example. Cisco's cutting-edge technology and strong cash flow give it the ability to take chances that many of its peers simply can't afford to take and go after both markets simultaneously.
Cisco's also aggressively worked to boost its operating efficiency. One way it's done this is through layoffs. Last year Cisco announced it was shedding up to 8% of its global workforce, or 6,000 jobs, in order to cut expenses at a time when it was in the midst of a major product transition -- namely, going from static networking products to primarily cloud-based products. While handing out pink slips is never enjoyable, the move ensures Cisco's expenses stays down while its operating efficiency stays up.
Lastly, Cisco Systems is a cash cow. Over the past three years Cisco has generated at least $10.37 billion in free cash flow annually, and is currently sitting on a net cash position of $31.1 billion. This bodes well for Cisco's payout, which has more than tripled over the past four years to $0.19 per quarter from just $0.06 per quarter. With a reasonable forward P/E of 12 and a dividend yield of 2.7%, Cisco Systems is giving income investors every reason to consider it a cheap dividend stock.
2. Best Buy (NYSE:BBY)
Believe it or not, Best Buy isn't dying! In fact, the company may be on the precipice of another growth spurt, which is what I believe makes it an intriguingly cheap dividend stock.
The big knock against big box retailers like Best Buy is that Amazon.com and other online retailers can undercut them on price. This means consumers can use Best Buy's stores to get a feel for which item they liked best, then go online to Amazon.com and purchase the item at a cheaper price. For a while this was killing Best Buy's business. The good news is that Best Buy's management team has been aggressive with its strategy, and it appears to be working.
Best Buy's strategy included closing around 50 of its larger stores and opening roughly 100 smaller stores focused on high foot traffic electronic items. These focused stores should help draw in traffic and make the shopping experience more streamlined for the consumer. Also, Best Buy has been more diligently focused on its direct-to-consumer sales, as well as in matching Amazon.com's pricing. Ultimately, its initiatives look to be paying off.
In the third quarter, reported in November, Best Buy delivered a 2.2% increase in comparable-store sales, including a 22% rise in domestic online comparable sales. Although its margins remained constrained by pricing competitiveness, Best Buy attributed its comparable-sales growth to strength in sales of tablets, computers, and televisions (yes, I really did say televisions!).
The end result is that Best Buy is valued at just 13 times forward earnings, and is on track to pay out a 2% yield to investors, which is right in line with the S&P 500 average. If investors keep their expectations with Best Buy realistic I suspect they'll be modestly surprised.
3. Ensco (NYSE:ESV)
You had to figure at least one of the highlighted cheap dividend stocks this week was going to come from the energy sector considering the plummeting price of crude oil. This week I'd suggest taking a closer look at Ensco.
As you might imagine, there's certainly some risk built into Ensco and its dividend, with West Texas Intermediate under $50 a barrel. There's the potential that Ensco could cut its dividend in order to conserve cash, or that its backlog could slow dramatically in future years since oil companies may be less inclined to spend on new projects and boost production with crude oil under $50 per barrel. But even with those risks I'd say that shares could be poised to rebound.
For starters, Ensco has a monstrous $11 billion backlog. To put this another way, Ensco could burn through its backlog without signing another contract and report consistent revenue for the next 10 quarters. Also, we shouldn't dismiss the fact that the offshore drilling market has a very high barrier to entry. This means that regardless of whether crude oil is at $50 or $100, there will still be demand from big oil and gas companies to drill. Within the Gulf of Mexico there may be no contracted driller better set up to succeed than Ensco.
Even if Ensco does see its backlog drop in the wake of lower oil prices, Wall Street's forecast for more than $4 in EPS in 2016 and 2017 gives it plenty of payout coverage on its current dividend (which is yielding north of 10% at $3 per share!). With a mid-single-digit P/E and a mammoth dividend, this cheap dividend stock could be the perfect investment for those with a long time horizon and a higher appetite for risk.
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.
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