I've said it before and I'll say it again: dividend stocks are the foundation upon which the best retirement portfolios are built.
A single-digit dividend yield may not appear impressive on the surface, but over many, many years the added returns from dividend payments compounded with the possibility of reinvesting those dividends back into more shares can supercharge your portfolio and allow you to retire in style.
Beginning this week, we'll highlight a few of the best deals in dividend stocks each week. Keep in mind that this list is arbitrary and merely a starting point for your research -- but consider these names at least worthy of your watchlist.
General Motors (NYSE:GM)
Sometimes the best deals in dividend stocks can be found when you have a broken company but not a broken business model.
The root of automaker General Motors' problems can be traced back to last year and its record number of recalls. In total, 30.4 million cars and trucks were recalled by GM in 2014, costing the company a whopping $4.1 billion. The recalls, combined with the potential loss of consumer trust, proved to be a drag on GM's stock throughout much of the year.
But the great thing about consumers is they often have very short memories when it comes to the types of issues that GM is currently facing. An easy way GM can regain consumers' trust (and that of investors) is to deliver great vehicles and solid sales results.
According to the company's June report, released earlier this month, things appear to be on track. Retail sales of Chevrolet and GMC surged by 9% and 12% respectively in June, with the company also achieving its 20th straight month in which commercial deliveries grew. Last month was GM's best June in terms of retail market share in four years, and its truck, van, and SUV market share jumped 2.1 percentage points to 38.9%.
Innovation remains a big boost to GM, with recent redesigns to its pickup lineup, improved fuel-efficiency, and a focus on in-cabin luxuries in non-luxury model vehicles serving as the driving force behind the company's sales resurgence. Based on Wall Street's projections, General Motors is valued at a mere six times forward earnings estimates. Even if GM's recall woes drag into 2016, we're not talking about a company with recurring long-term financial concerns. This makes GM's 4.6% dividend yield highly attractive to income investors.
Xerox may not be the most exciting company in the world, and its name may be synonymous with photocopies (which almost feel archaic these days), but this company is in the long process of moving beyond its copying roots.
Xerox is transforming itself from a print and copy powerhouse into a software company targeting businesses and local governments. For instance, Xerox is the company behind the payment processing for California's Medicaid enrollees, as well as the electronic tolls used on some of Texas' highways. Xerox is also making a push to move into the cloud, especially in the healthcare sector, where everything is moving toward a digital and easily accessible environment.
The potential for Xerox is huge, but getting there could take patience. In Xerox's latest quarter a restructuring charge wiped out most of its profits. Restructuring charges have become an all-too-common occurrence over the past three years as the company looks to cut expenses. But the end result of these restructurings should be a more efficient business with a more streamlined cost structure, one that'll be primed to deliver more robust profits and dividends to investors by the end of the decade. And don't forget that even while Xerox makes the move towards becoming a service-oriented business, its legacy printing business is still generating substantial cash flow in the meantime.
All told, Xerox has generated close to $1.9 billion in operating cash flow over the trailing 12-month period, and it's trading at just 10 times forward earnings. When you factor in its 2.6% dividend yield and reasonably low payout ratio (on an adjusted earnings basis), this is a stock that medium-risk investors looking for fairly steady income with a longer time horizon might want to consider.
Finally, for the best deal in dividend stocks this week I'd direct income seekers' attention to heavy-duty engine manufacturer Cummins.
In recent months Cummins' stock has been under pressure for a variety of reasons, none more readily apparent than the collapse of oil prices. While falling oil prices make life easier for consumers and truckers at the pump, lower fuel prices have the potential to reduce the impetus of businesses and consumers to buy newer equipment that's more fuel-efficient. That can be bad news for Cummins.
But it's my opinion that a low oil-price environment is relatively temporary, and that the longer-term trend favors Cummins. Specifically, as my colleague Dan Caplinger pointed out recently, the U.S. Department of Transportation and the Environmental Protection Agency have been honing in on tougher regulations that would require heavy-duty engine manufacturers to improve engine efficiency. This isn't a worry for Cummins, which has been producing highly efficient engines and even natural gas engines through a joint venture for years. This may even ultimately shuffle more business Cummins' way when trucking business are required to update their noncompliant fleets to meet new government standards.
There's also a rather large untapped emerging market opportunity that's only now starting to industrialize. There will more than likely come a time when China, India, Brazil, and other growing markets will turn to more fuel-efficient and low-emission trucks in order to keep pollution in major cities at bay.
Following a recent 25% dividend payout hike, Cummins is now yielding a broader-market-topping 3.1% for investors, and it's trading at just 11 times next year's projected profits. It's a deal that could have some investors pressing the gas pedal.