Dividend stocks are the cornerstone of many well-run retirement portfolios. This is because 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 profit to shareholders.
Dividends can also 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 an opportunity to compound 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 look at three cheap dividend stocks you should consider buying right now.
1. American Express (NYSE:AXP)
American Express has not had a good start to 2015. Following a weaker than expected fourth-quarter earnings report in which AmEx missed Wall Street's consensus earnings-per-share estimate for the first time in a year, the credit card provider announced that it was losing its 16-year exclusive partnership with Costco Wholesale. Costco accounted for 8% of AmEx's total billed business in 2014, a fifth of its loans, and about a tenth of its total cards in force, according to Barclays. In other words, American Express has some big shoes to replace, and skepticism among investors has rightfully been high.
But investors have also been acting like American Express is all washed up now that it is losing Costco's business. While this could create some speed bumps in the near term as the company adjusts its long-term strategy and boosts its marketing expenses in order to attract new clientele, there are still reasons to believe any sell-off in AmEx stock is a potential buying opportunity.
For starters, consumers like the AmEx brand. In the 2015 Brand Keys Customer Loyalty Engagement Index, AmEx tied with Discover Financial Services for the top spot in credit brand loyalty among 10 different ranked brands. I'm certain its partnership with Costco played some role in that, but the exclusivity of the AmEx brand, in that it's known to target a more affluent customer, certainly makes the user feel special and unique. A loyal customer is likely to more willingly accept variable APR increases and potentially suggest the card to friends and family.
American Express can also benefit from being both a lender and a payment processor, which could help it grow faster than a number of its credit peers. As long as the U.S. and global economies are growing, consumers are likely to increase the amount they're charging, thus boosting AmEx's processing fees. In addition, the more people charge, the more likely they are to carry a balance, thus allowing AmEx to collect interest on its outstanding credit card debt. The only real concern investors should be aware of here is rising delinquency rates when economic growth is challenging.
AmEx's current yield of 1.3% might not be much to look at, but there's ample room for dividend growth with a payout ratio of just 18%. With emerging markets potentially calling AmEx's name, I'd suggest you not be hasty in writing this cheap dividend stock off just yet.
2. 3M (NYSE:MMM)
Surprise, surprise -- another record year of revenue and profit for Dividend Aristocrat 3M in 2014.
3M owes much of its success to its industrial heritage, improving operating efficiency, and now-diversified business that is separated into five steadily growing segments. As my Foolish colleague Eric Volkman pointed out last month, 3M's five segments have delivered year-over-year growth for six consecutive quarters, and that does not appear likely to change in 2015, even if a stronger U.S. dollar and foreign currency translation make apples-to-apples comparisons a bit tougher.
Two aspects 3M's operating segments all share are high growth potential and substantial pricing power. For example, 3M has high growth opportunity with its health information system and infection prevention products in markets beyond the U.S., as well as commercial transportation worldwide. Not to mention, who can help but buy 3M Post-it notes, right? In addition to hitting high growth segments, many 3M products are specialized or have few competitors, enabling the company to raise prices on those products at or above the inflation rate. This has been key to the company maintaining its margins.
Considering 3M's significant growth potential in Asia, as well as its propensity to grow the business through small but accretive acquisitions, the company could raise its dividend for a 57th year in 2015 and add to its already impressive 2.5% yield. With Wall Street expecting $9.40 in EPS by 2017, and 3M exhibiting a long history of "boring" but steady growth, risk-averse investors should have this cheap dividend stock on their radar.
3. ONEOK Partners (NYSE:OKS)
Lastly, I would suggest higher-risk investors pursuing higher yield consider looking toward the energy sector and giving dividend behemoth ONEOK Partners your full attention.
ONEOK Partners is a transportation, storage, and processing company for its general partner ONEOK in the mid-continent region of the United States, specifically focused on natural gas and natural gas liquids. Net income improved to $94.5 million in fourth-quarter 2014 from $90.7 million in fourth-quarter 2013, and distributions in the fourth quarter in the form of a dividend rose by 20%, to $168.5 million, from the year-ago quarter.
What makes ONEOK Partners and midstream companies in particular such attractive investments is the need to invest in transportation and storage infrastructure to meet growing energy demands in the U.S. and abroad, as well as the fee-based structure of the business. ONEOK Partners' contracts are set up for the long term and structured such that investors and Wall Street can expect a very predictable cash flow figure each quarter. Wall Street loves predictability.
Not to mention, ONEOK Partners is also a master limited partnership, providing it with some hefty tax breaks that result in what is now a better than 7% dividend yield. Furthermore, ONEOK Partners plans to boost its dividend in 2015 by another 4% to 8%. Although that is down a bit from prior guidance due to commodity price fluctuations, it still preserves what should be a killer dividend for years to come.
If you're looking for a smart way to play the energy sector, MLP pipelines such as ONEOK Partners could be the perfect route.
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 Costco Wholesale. It also owns shares of Discover Financial Services and recommends 3M, American Express, Oneok, and Oneok Partners. 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.