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.
Home Depot (NYSE:HD)
I'll go right ahead and say it: Home Depot isn't as cheap as it once was. But based on some of the catalysts I'm going to relay below, it's still a potential bargain.
Home Depot is the do-it-yourself monster in the home construction, home projects, and even commercial construction space. Home Depot's business is set up in such a way that it can potentially thrive in a number of shifting environments. If the housing sector is rapidly expanding, Home Depot's commercial and contractor business is likely to see benefits. If housing growth slows or the U.S. economy slumps and people aren't in the home-buying mood, Home Depot turns to its residential consumers and basks in remodels and renovations. This two-pronged approach works well to ensure that Home Depot's top- and bottom-lines don't just fall off a cliff one day when the economy goes into a recession.
The company has also made investments within its stores and in its employees that are resulting in substantial sales growth. Improved training of associates so they have a "knowledge" edge over employees working for its peers and a streamlined website are among the ways that Home Depot has improved its customer experience. Additionally, the emphasis it places on getting its customers to sign up for the Home Depot credit card adds an extra hook to keep consumers tied to its brand.
In the fourth quarter, Home Depot announced an 8.3% increase in sales, including a nearly 9% increase in same-store comparable sales in the U.S. as well as an $18 billion share repurchase authorization and a 26% increase to its dividend. Plain and simple, Home Depot is a monster, and its PEG ratio of 1.5 and dividend yield of 2.1% suggest there could be a lot to like for income investors on the lookout for cheap dividend stocks.
Norfolk Southern (NYSE:NSC)
You could certainly say -- in both a metaphorical and literal sense -- that North and Central American railroad operator Norfolk Southern has been "railed" over the past three weeks.
Shares of the company are down roughly 7% after the company lowered its full-year sales growth forecast from the mid-single digits to the low-single digits, citing energy carload weakness. For instance, Norfolk Southern anticipates that coal shipment volumes will be down 20% year-over-year, hurt by lower natural gas prices. If natural gas prices remain depressed, it encourages electric utilities to make the switch from coal-fired plants to natural gas-fired, hurting demand for coal. As expected, Wall Street pounced on Norfolk following the announcement.
But I'd opine that this weakness in Norfolk Southern could represent an excellent buying opportunity into a very cheap dividend stock.
For starters, it's unlikely that energy prices are going to remain depressed over the long-term. Coal continues to be the nation's No. 1 source of electricity generation, so it's not as if it'll disappear overnight. Perhaps once the industry undergoes some "weeding out" and consolidation we could begin to see a rebound in coal prices and a return of coal demand. Of course, this should hold true for all commodities (oil, natural gas, coal, and so on), which are finite resources.
Another key strategy for Norfolk Southern is to be nimble and stay ahead of the curve. The company hasn't been shy about spending billions on new locomotives and cars in order to increase carload capacity, fill more orders, and improve its operating efficiency through better fuel mileage. I also suspect Norfolk Southern's focus on intermodal and crude oil transport should pay substantial dividends over the long run.
Sporting a forward P/E of less than 14 and a dividend yield of 2.3% with just a 35% payout ratio, I'd venture a guess that this cheap dividend stock could have many years of dividend increases still to come.
Western Digital (NASDAQ:WDC)
Lastly, I'd invite income-seeking investors to direct their attention to the technology sector and take a good look at data storage solutions provider Western Digital.
Like all companies, Western Digital has its weaknesses. Investors considering buying into Western Digital should understand that the data storage industry is cyclical, and that its technology is fairly commoditized, meaning innovation is what drives margin maintenance.
But in spite of these potential weaknesses, I'd suggest Western Digital, which is valued at a mere 11 times forward earnings, be considered for a spot in your portfolio.
Perhaps the most exciting growth drivers for Western Digital are the rapidly growing storage demands for enterprise data centers and the cloud. Companies are becoming more digital and data-oriented by the day, and their need to store data in the cloud is growing. Last year Forrester Research predicted that cloud-based revenue could reach as high as $191 billion by 2020, meaning Western Digital has a huge opportunity to sell storage solutions to businesses still in the process of upgrading their cloud. This is a long-tail, not overnight, opportunity for the company.
Also, the demise of the workplace PC may have been vastly overrated. This isn't to say that smartphones and other smart devices aren't giving the traditional PC a run for its money, but a ground floor of demand for enterprise customers in terms of PC use and storage appears to have been laid over the past year. Best of all, the average selling price for storage products sold to enterprise customers was up in the fourth-quarter from the year-ago period.
With a recently increased 2.2% dividend yield in tow, I believe income investors would be wise to give Western Digital another look.
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 Western Digital and recommends Home Depot. 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.