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.
Waste Management (NYSE:WM)
One person's trash may very well be another person's treasure when it comes to cheap dividend stocks.
Waste Management is first and foremost a refuse company, but it has a number of other business which can help, or hinder, its growth, depending on the economic environment. In recent quarters weak metal prices have hurt the company's recycling operations, resulting in some difficult year-over-year comparisons. While that's a bit unfortunate for short-term traders, there are compelling reasons to believe Waste Management could be an attractive long-term buy.
To begin with, the company is offering a basic service that we all need: trash collection. The trash business isn't very diverse; it tends to be made up of one or two companies for each city, affording refuse collectors the ability to establish pricing that'll keep them profitable and well ahead of the inflation curve. As noted in its fourth-quarter earnings release, core prices rose by 4% in 2014, up from a 3.8% increase in 2013.
As an inelastic service, Waste Management and shareholders can also count on a certain level of cash flow each quarter. This can be particularly helpful when attempting to establish a budget months or a year in advance, or when it comes to deciding how much to raise the dividend!
But, Waste Management's other business opportunity -- recycling -- affords the company multiple ways of generating revenue from your trash. From collection to the renewing of that resource, Waste Management is a master at maximizing the value of your trash. As evidence of this, its internal revenue growth from yield for collection and disposal operations rose 2.3% in 2014. This yield had been in the low 1% range just a few years prior.
With a dividend yield near 3% and a reasonable forward P/E of 20, Waste Management has all the makings of a cheap dividend stock you can buy and hold for a very long time.
Banks may still carry bad memories for investors with the mortgage bubble still fresh in their minds, but Southeastern regional banking giant BB&T, a retail and commercial financial services company, has done a good job of casting those memories well into the past.
In January BB&T reported its full-year results, delivering $2 billion in net income and $2.75 in EPS, representing 25% year-over-year EPS growth. Although I'd suggest investors not get accustomed to 25% year-on-year growth, mid-to-high single-digit growth is certainly possible thanks to a number of factors.
For starters, BB&T is focused on growing its business through acquisitions. As BB&T's President Ricky Brown noted last year, the company's acquisitions must have a favorable reward-versus-risk ratio, but that ultimately the bank is looking to boost its total assets by 5% to 15% at a time through acquisitions. In November, for example, BB&T announced plans to buy Susquehanna Bancshares and its 245 branches for $4.05 in cash and 0.253 shares of BB&T stock. The move will add $13.6 billion in deposits and $18.6 billion in assets when all is said and done.
It's also a great time to be on the hunt for BB&T, which operates in both populated and rural communities. Many larger banks are consolidating or selling branches in the hope of cutting costs and focusing on larger cities, allowing BB&T to nab rural branches for a potentially great price point.
BB&T has also done an excellent job of controlling its expenses and improving the quality of its assets. Noninterest expenses fell 10% to $1.4 billion in the fourth quarter, while deposits and loans increased, nonperforming loans and delinquent loans decreased, and the bank actually cleared a profit on the sale of $140 million in residential mortgage loans, of which, the press release notes, many were nonperforming.
Finally, BB&T's capital plan was approved by the Federal Reserve following the latest stress tests. Assuming it passes in late April, BB&T could boosts its quarterly dividend by 12.5% to $0.27, taking its dividend yield potentially up to 2.7%. Boasting a forward P/E of just 12, BB&T could still have ample room to run.
AvalonBay Communities (NYSE:AVB)
Following last week's Federal Open Market Committee meeting, it's looking more and more likely that there will indeed be a rate hike in 2015. While consumers and lenders prepare for this eventual federal funds target increase, shareholders in apartment real estate investment trust AvalonBay Communities are licking their chops.
AvalonBay is an operator of apartment communities across the country, and it tends to target middle-to-upper income consumers. Its higher rental price points might at first make you think the company has a hard time filling up its units, however, by focusing on a more affluent clientele it tends to generate more consistent and reliable cash flow than many of its peers.
More importantly, if the federal funds target is increased by the Fed, mortgage lending rates will soon follow. The quicker rates rise, the less incentive there is for prospective homeowners to buy a home or take out a mortgage. In effect, rising rates could send prospective home buyers right back into renting, which would be a dream scenario for Avalon.
Not to mention, higher interest rates shift the bargaining chip back to AvalonBay when it comes to the company's rental pricing power. Because management understands that rising rates will entice people to continue to rent, it has a means to boost its rental prices within reason to finance rental community acquisitions, build-outs, and to stay ahead of inflation.
As AvalonBay noted in its fourth-quarter earnings results released in late January, rental revenue for established communities rose 4.1% and included a 3.8% increase in rent pricing as well as a 0.3% boost in economic occupancy. By comparison, operating expenses for established communities rose by less than 1% in Q4 from the previous year.
Like BB&T, Avalon also announced a handsome dividend increase of 7.8%, placing its annual payout at $5 per share on the nose. Because AvalonBay is a REIT it's required to pay out a minimum of 90% of its profits in the form of a dividend to shareholders in order to avoid higher corporate taxes. Buying REITs is a smart way for income investors to find superior yields to the average S&P 500 stock.
With the macroeconomic outlook pointing in AvalonBay's favor, I'd suggest investors looking for a cheap dividend stock add this to their radar.
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 Waste Management. 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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