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 to its investors on a regular basis.
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 makes for less day trading and volatility. Lastly, dividends can be reinvested, giving buyers a chance to compound their gains over the long run. These payouts can mean the difference between simply retiring and living out your dream retirement.
With that in mind, let's have a look at three cheap dividend stocks you should consider buying right now.
1. Wal-Mart (NYSE:WMT)
Let's be clear: Wal-Mart isn't the growth powerhouse it once was, but that doesn't mean there isn't considerable value left to be squeezed out of this retail giant over the long run.
Over the past couple of decades, Wal-Mart has transformed itself from a cost-conscious retailer into a one-stop shop for consumers of all walks. In terms of revenue, Wal-Mart is the largest grocer in America. Keep in mind that grocers tend to have razor-thin margins, so while Wal-Mart's trailing-12-month profit margin of 3.3% might seem unimpressive, consider that the bulk of the company's revenue comes from elsewhere. Groceries are serving their purpose, as they keep consumers in stores longer, encouraging them to purchase high-margin discretionary items.
What's exciting is that Wal-Mart's transformation is ongoing. For one, the company has made multiple forays into financial services. Last year Wal-Mart announced that, in a partnership with Green Dot, it was establishing its own mobile banking service and offering GoBank checking accounts at select locations. The idea could be gold, as GoBank has traditionally offered no overdraft fees or minimum balance requirements, so this partnership could be a great way to attract new customers and keep existing customers loyal.
Additionally, Wal-Mart announced earlier this month its intention to allow consumers to pick up their tax refunds at Wal-Mart -- for a fee, of course. The end result of Wal-Mart's ongoing transformation is that it keeps consumers in its stores longer.
With the U.S. economy growing by a robust 5% in the third quarter and fuel prices about half of what they were a year ago, it's quite possible that Wal-Mart could see a multiyear surge in consumer spending. At a forward P/E of 16 and a dividend yield of 2.3% (slightly ahead of the S&P 500's average yield), I'd suggest Wal-Mart could be a deceptively strong and cheap dividend stock worth digging into.
2. Travelers (NYSE:TRV)
The insurance industry is far from the most exciting, but if there's a company that just keeps delivering for shareholders year in and year out, it's Travelers.
Last month, Travelers reported record net income for the full year and fourth quarter, with book value for the year rising by 10%. Travelers noted a number of strengths, including an improved combined ratio (a measure of margin for insurers) stemming from more profitable underwritten policies, as well as record operating income at its bond and specialty insurance unit. A relatively tame year for catastrophes also helped Travelers' bottom line.
It seems quite possible that Travelers could have many great years ahead. For starters, consider the positive impact to Travelers' investment income when the Federal Reserve decides to raise its federal funds target rate. Insurers have a hoard of cash that they invest in safe assets, usually CDs and bonds, which, along with consumers' premium payments, help pad insurers' pockets. There's a big difference between getting less than 1% for a CD and getting, say, 3% in a year or two. Even if we don't know precisely when the Fed will raise rates, it's almost certain they won't stay this low forever.
Insurers also boast unique pricing power in pretty much any economic environment. Homes and autos that have loans outstanding on them are usually required to be insured, making property and casualty insurance a near-necessity for many Americans. Travelers can use catastrophes as a means to raise premiums, or it can simply raise them during lower-claim years with the intention of boosting cash reserves in anticipation of the next disaster. It's really a win-win business model.
Currently boasting a forward P/E of less than 11 and a reasonable 2.1% yield, Travelers looks like a safe long-term addition to an income-seekers' portfolio.
3. Bank of Hawaii (NYSE:BOH)
Finally, staying within the financial sector, let's take a closer look at why Bank of Hawaii could be an attractively cheap dividend stock worth considering for your portfolio.
The downside for banks right now, aside from the fact that consumers have a distaste for most of the industry, is that historically low lending rates are constraining their ability to make money. For many, net interest margins (the difference between what they pay to borrow money and what they make from lending it) are near historic lows, which means banks have struggled to improve their profits and return on assets, two of the more closely followed metrics for banks.
For Bank of Hawaii, the story hasn't been all that different. In its fourth-quarter results announced last week, the bank reported that its return on average assets was flat, up 1.12% relative to last year, while its net income expanded modestly to $41.2 million from $39.1 million in Q4 2013. But there's so much more to be excited about.
For starters, the bread-and-butter strategy of the banking industry is growing deposits and loans, which Bank of Hawaii excels at. Total deposits increased to $12.6 billion in Q4 2014 from $12.4 billion in the previous quarter, while its loan and lease portfolio expanded to $6.9 billion from $6.6 billion. When lending rates begin to rise, Bank of Hawaii will benefit from higher net investment income, as well as higher lending rates. Further, considering its roughly 10% decline in total non-performing assets, the message is clear: Bank of Hawaii's traditional growth avenues are doing just fine.
Another point worth mentioning is that Bank of Hawaii's strategic location in Hawaii places it smack-dab into one of the lowest-unemployment environments in the U.S., as well as a hot spot for tourists and travel. So long as the Hawaiian economy is firing on all cylinders, Bank of Hawaii should continue to deliver strong results.
Bank of Hawaii's forward P/E of 14 is mildly attractive, but once you factor in its solid deposit and loan activity, as well as its 3.2% yield, its appeal only increases.
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 Bank of Hawaii. 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.
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