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2 Undervalued Dividend Stocks to Buy Now

By Daniel Miller - Apr 20, 2013 at 1:00PM

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One goes ex-dividend May 1. Check it out now.

Some dividend stocks aren't great, and some are just plain bad. Some dividends themselves aren't sustainable, while some aren't even worth your time. But let's look at two stocks that offer yields near 3% and may offer even more upside with the stock prices themselves: Caterpillar (CAT -4.32%) and Ford (F -2.72%).

(F -2.72%)

(F -2.72%)

Ford is a great turnaround story, having rebounded from losses of more than $30 billion in the 2006-08 period to become profitable today. It got there without a bailout, unlike its Detroit peers, and that has helped it maintain a favorable brand image. Since the recession, it's estimated that Ford has been able to lower operating costs and grow its economies of scale enough that it's estimated to be able to break even in an environment of 10 million vehicle sales a year, even as sales are expected to reach 15.4 million in the U.S. this year.

Things are also looking positive for Ford's first-quarter earnings release next week. The Fusion had its best quarter of sales ever, the Escape also posted record sales months during the quarter, and the F-Series -- which brings home immense profits -- has sold extremely well so far this year.

In January, Ford doubled its dividend from $0.20 a share annually to $0.40. That puts us right at a 3% yield, which begins to open the door for income investors, who could provide more demand for the stock going forward. It's also possible that with a forward payout ratio of 22%, Ford could opt to increase the dividend yet again -- though I wouldn't expect a move until losses in Europe subside. I think it's a good time to buy this stock, which goes ex-dividend on May 1.

Caterpillar is the No. 1 global player in its market and has a strong economic moat protecting its profits. Its large dealer network is known for great servicing and high quality, helping grow its brand image above its competitors. Right now, though, Caterpillar faces short-term headwinds, as it relies on international sales for the majority of its profits. The U.S. economy is slowly rebounding, but the global recovery is much slower. The acquisition of Bucyrus -- which gets almost half of its operating profits from the mining end market -- is also putting a drag on the company. But when emerging markets -- notably China, India, and Africa -- begin to pick up steam, the upswing in building more infrastructure in those regions will boost sales for Caterpillar. This company could still have its best days ahead.

Caterpillar's quarterly dividend of $0.52 works out to a 2.4% annual yield. The company also has a long track record of upping its dividends to shareholders, having done so for 19 consecutive years.

Bottom line
Both of these companies have a bright long-term future if you can be patient through the short-term headwinds. Both trade at attractive prices right now and offer a dividend to help investors through the short term. I definitely think both are dividend stocks to buy now. 


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Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
$197.82 (-4.32%) $-8.94
Ford Motor Company Stock Quote
Ford Motor Company
$12.50 (-2.72%) $0.35

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