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.
Union Pacific (NYSE:UNP)
Railroads aren't a very exciting investment, but if there is something to be said about the logistics industry as a whole, it's that it often commands predictable cash flow and strong pricing power.
In its fourth-quarter earnings report Union Pacific delivered freight revenue growth in all but its automotive segment, which was flat. This means the somewhat challenged agricultural products segment and coal both led to a 9% increase in revenue. Yes, I did just say coal!
The reason railroads like Union Pacific continue to see their top and bottom lines expand has to do with their fuel expenses. On an efficiency basis, railroads can transport more goods at a lower fuel cost than any other logistics provider. Also, Union Pacific has been heavily spending on new locomotives and railcars in an effort to improve its fuel efficiency. Compound this with the fact that fuel prices are at their lowest levels in years, and you have a recipe for improved margins and, as Union Pacific reported in the fourth quarter, a 27% increase in quarterly profits from the previous year.
One thing to keep in mind with Union Pacific is that it's a cyclically driven company. It needs the U.S. economy to continue growing in order to grow itself. The good news here is that U.S. GDP is expected to pace between 2% and 3% growth in 2015, signaling possible additional growth this year from its industrial freight segment.
Union Pacific's forward P/E of 15 appears pretty reasonable when taking into account its pricing power and practical basic-needs service status, but it becomes even more delectable when you realize that it's raised its dividend 12 times since 2006. Currently yielding 2%, income investors would be wise to stop at the tracks for this cheap dividend stock and give it a closer look.
A potentially smart way to earn substantial dividend income is to turn to the high-margin pharmaceutical sector and search around for bargains. One such company you may want to keep your eye on is Novartis and its nearly 3% dividend yield.
Novartis, like any big pharma stock, is grappling with a wave of patent exclusivity losses and is actively looking for ways to supplement its growth organically and through acquisitions. One recent move that could pay off in a big way over the long run was its asset swap and alliance deal with GlaxoSmithKline (NYSE:GSK).
Under the terms of the deal, GlaxoSmithKline will acquire Novartis' vaccine division for up to $7 billion, while Novartis will pay Glaxo up to $16 billion for its oncology products. The move should benefit Glaxo by making it a formidable player in vaccines, while giving Novartis access to highly specialized and rapidly growing cancer drugs. The two companies also formed a joint venture for their consumer products divisions.
Novartis has plenty of organic growth opportunities, too. For example, LCZ696, an experimental heart failure medicine, reduced the risk of death from cardiovascular causes by 20% in the PARADIGM-HF trial, while also cutting heart failure-related hospitalizations by 21%, and the risk of all-cause mortality by 16%. With a priority review in its sails, it seems likely (in my opinion) that LCZ696 will get a nod of approval from the Food and Drug Administration by this summer, and may wrangle in $1 billion-plus in sales within its first year if launched successfully.
Over the last 12 months alone, Novartis has generated $13.9 billion in operating cash flow, and its new product portfolio will be comprised of about 20% high-growth oncology revenue. Its forward P/E of 18 might not appear cheap at first, but its Glaxo deal coupled with the launch of new therapies could easily send shares higher and support a consistent dividend yield of around 3%.
Portland General Electric (NYSE:POR)
Lastly, I'd suggest income investors seeking cheap dividend stocks take a closer look at Portland General Electric in the electric utility sector, as its promising dividend yield and steady growth prospects could prove worthwhile for investors over the long haul.
As you might expect when dealing with an electric utility, revenue growth tends to be in the low- to mid-single-digits. This is a result of dealing with regulated energy commissions and having to abide by their ruling when it comes to rate hike requests. In 2014, Portland General Electric saw its net revenue rise by nearly 5% to $1.9 billion, but it delivered a major increase in per share profits to an adjusted $2.18 in EPS, from $1.35 in 2013, largely tied to the absence of a $52 million expense.
What makes a company like Portland General Electric attractive for an income investor is that it has strong pricing power since it's providing a basic-need product (electricity), and its cash flow is therefore extremely predictable since it's in a regulated industry. While you may settle for tame growth prospects, you can nearly count on slow but steady growth every year, with the exception of unexpected repairs every now and then.
Investors should be really excited about Portland General Electric's new projects, which include a 267 MW wind farm and two natural gas-fired power plants with a combined capacity of 660 MW. Although these projects are costly, they're also the reason Portland General Electric will see its operating return on equity and utility pricing go up over the coming years. These facilities will also handily drop the company's long-term costs.
At a forward P/E of 15 and a dividend yield of 3%, this is an income stock investors would be (small-f) foolish to ignore.
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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