Source: Flickr user slgckgc.
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 oriented more toward the long term, which usually makes for less day trading and less 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. General Electric (GE -1.75%)
When I think of cheap dividend stocks that are going to give income investors the ability to sleep well at night, one that continues to wiggles its way onto my personal radar is General Electric.
Source: General Electric.
Why General Electric? Primarily because of the company's incredible diversity. It has seven operating segments that can all act as hedges to one another both in growing and in contracting economies. It has basic-needs products in its power and water segment and can take advantage of economic expansion with its aviation and oil and gas segments. Of course, oil and gas operations aren't the optimal places to be right now, but given its diversity, GE shareholders aren't exactly sweating the drop in crude oil prices.
GE has also transformed itself over the past couple of years into a company reliant on the industrial sector. It's moved away from some facets of its financial arm, GE Capital, which sapped its performance during the Great Recession, and has instead gone back to its roots with a focus on targeting 70% of its revenue from industrials. The industrial sector is where GE has its core innovative knowledge, and it's also liable to deliver better margins over time.
Source: General Electric.
In General Electric's most recent quarter, the conglomerate announced that profits grew by 23% per share in its industrial segment, margins expanded by 50 basis points to 18.8%, and its backlog grew from $244 billion to $261 billion on a year-over-year basis. More importantly, it's delivering this growth organically and with the aid of acquisitions.
With GE currently sporting a forward P/E of 14 and packing a dividend punch in the form of a 3.7% yield (nearly twice that of the S&P 500), I'd have to suggest income investors take a closer look at this cheap dividend stock.
2. Xerox (XRX)
This isn't your grandparents' Xerox, folks, but it's not exactly lighting things up in the eyes of Wall Street analysts, either.
In Xerox's recently reported fourth-quarter results, it announced a 3% decline in revenue (1% if you exclude negative currency effects) to $5 billion, and an adjusted profit of $0.31 per share. As has become somewhat common with Xerox, its per-share profit topped estimates while revenue missed the mark. This was Xerox's sixth quarter in a row reporting a revenue decline. The company also lowered its EPS outlook for fiscal 2015 due to currency fluctuations since it gets about a third of its revenue from overseas markets.
Source: Xerox.
On the surface, that all sounds rather ugly. I know, because I've been following Xerox like a hawk for some time now. But, like GE with its transition toward the industrial sector, Xerox's transition toward a service-oriented business and away from static hardware is beginning to take shape. Higher-margin services now comprise 54% of Xerox's revenue, with the company on pace to hit a target of 65% of its revenue coming from services by the end of the decade. In constant currency terms, revenue from services rose 3% during the quarter, with margins near 10%.
In addition to tight cost controls, which have led to better operating margins, Xerox has established some strong niches in healthcare and transportation that should lead to better growth prospects in the second half of the decade. Xerox has been winning a handful of contracts to manage Medicaid payments in select states, including California, and has been the beneficiary of automated toll technology contracts in Texas. These contracts supply predictable revenue and cash flow and also make it likely that a client will renew its contracts with Xerox.
Looking ahead, Xerox is valued at just 12 times its forward earnings and, following the announcement of a 12% dividend hike, is sporting a 2.1% dividend yield. It's no longer the growth stock it once was, but the new Xerox is a cheap dividend stock worthy of income investors' radars.
3. Umpqua Holdings (UMPQ)
Lastly, we'll wrap up with mid-cap commercial and retail bank and lender Umpqua Holdings, which is based in the Pacific Northwest.
Like Xerox, Umpqua's fourth-quarter earnings results left a lot to be desired with investors. For the quarter, Umpqua delivered net earnings of $52.4 million compared to $58.8 million in the year-ago quarter. The $0.27 in operating earnings reported fell short of Wall Street's projections by $0.02 per share.
Why the weakness? The two culprits were weak mortgage servicing income, which has pretty much been the norm across regional and national banks, and higher expenses tied to its acquisition of Sterling Financial. While it's unfortunate to see mortgage services income sinking with lending rates as low as they are, investors should keep in mind that these acquisition expenses are non-recurring, and by this time next year, Umpqua will likely benefit from favorable expense comparisons.
Source: MyFuture.com via Flickr.
There were plenty of other aspects to like about Umpqua's Q4 report. For starters, the bread and butter opportunities of growth for banks -- deposits and loans -- both grew for Umpqua. Total deposits increased by about 1% to $16.9 billion, while gross loans and leases rose $68.5 million to $15.3 billion. Call me old-fashioned, but I like a bank that can keep the cash coming in and the high-quality loans flowing out.
We also saw the credit quality of Umpqua's loan portfolio improve once again. Net charge-offs to average loans and leases fell to just 0.12% from 0.14%, and the provision for loan losses fell to just $5.2 million from $14 million in Q4 2013.
Between the Sterling Financial transaction boosting its banking coverage to a plethora of improving deposit, loan, and credit quality metrics, there's a lot to like with Umpqua trading at 13 times forward earnings. Not to mention, finding a bank that can support a 3.6% dividend yield is tough these days. I'd suggest long-term-minded income investors give Umpqua a closer look.
