Regardless of how well or poorly the stock market is performing, one thing is for certain: Dividend stocks are always in style.
I've often said that dividend stocks are the foundation of a great retirement portfolio -- and for good reason. For starters, companies that pay dividends usually have a long history of profitability and a sound long-term outlook. A business that doesn't have a clear path to growth typically isn't going to pay a dividend. In other words, buying dividend stocks often means buying into high-quality, profitable companies with long histories of success.
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Secondly, dividend stocks can help hedge the stock market's inevitable moves lower. Since 1950, based on data from Yardeni Research, the S&P 500 has corrected lower by at least 10% (when rounded to the nearest digit) on 35 occasions. Owning dividend stocks is a great way to help hedge against these market swoons. As an added bonus, since dividend stocks tend to attract long-term investors, they can sometimes also be far less volatile during corrections.
Lastly, dividend stocks give you the ability to take advantage of compounding over time by reinvesting your payout back into more shares. Doing so allows your ownership in a business to grow, as well as your corresponding payout. Compounding is a tactic some of the smartest money managers use to increase the value of their funds over time.
But some of the best dividend stocks can be found floating well below investors' radars. Here are three bargain bin high-yield dividend stocks you've probably been overlooking this winter.
Teva Pharmaceutical Industries Ltd.
We'll begin by looking at a drugmaker that's near and dear to my heart (and in my portfolio), Teva Pharmaceutical (TEVA 0.34%).
Teva, the world's largest generic-drug maker, has run into a brick wall of issues in recent months. It's been the subject of investigation with regard to generic drug price-fixing, it wound up losing a patent case that invalidated four patents to its top-selling branded multiple sclerosis drug Copaxone (Teva sells a mixture of branded and generic products), and its CEO of three years announced his resignation within the past few days. The nail in the coffin is the company's heavy debt load, attributed partially to its acquisition of generic drug unit Actavis from Allergan for $40.5 billion.
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While its share-price performance has been nothing short of dismal, there could be plenty of opportunity here for income investors with a long-term time horizon. For instance, its deal to acquire Actavis is transformative in that it should yield $1.4 billion in cost-savings by 2019, and it greatly expands Teva's generic product portfolio and geographic reach. As the leader in generic market share, Teva is poised to benefit from improved pricing power, and the growing need for generic drugs in an environment where branded-drug pricing is getting out of hand (at least in the U.S.).
The company's Copaxone worries may also be overblown. Teva has proven masterful at fighting the entrance of generic competitors in court, or at the very least moving physicians and MS patients to its more convenient three-times-per-week formulation as opposed to once-daily injection. While it'd be foolish (with a small "f") to expect Copaxone to grow in the wake of generic challenges, I'd opine its demise is greatly exaggerated.
With roughly $5 in full-year EPS expected in the upcoming year, Teva is being valued at less than seven times profit expectations. What's more, it's sporting a 4% dividend yield that management appears to have no intention of cutting. Teva could be a bargain bin high-yield dividend stock to pick up this winter.
Macy's, Inc.
Similar to Teva, department store giant Macy's (M +0.72%) has hit a rough patch, to say the least. Same-store sales during the holiday months were down more than 2%, and Macy's recently announced that it'd be closing 68 stores and cutting roughly 10,000 jobs. This 68-store closure is part of an originally announced plan to close about 100 underperforming locations as the convenience of online shopping eats into its brick-and-mortar dominance.
Image source: Macy's.
While cutting employees and closing stores isn't a desired business tactic, it's not one that investors shouldn't punish Macy's for too severely. Beginning this year, its job cuts and store closure will save the company $550 million, $250 million of which will be reinvested in the company's digital business, Macy's Backstage discount stores, and in its China expansion. With Macy's admitting its problems now, it should be able to avoid the same woes that plagued Sears Holdings when management waited too long to confront its problems head on.
More importantly, Macy's will be pouring money into its e-commerce and mobile business in a better effort to reach a new generation of shoppers that prefers the convenience of shopping from home. Digital sales have far less overhead for Macy's, and at last check, both macys.com and bloomingdales.com were growing sales by a double-digit percentage. As these digital channels become a larger percentage of Macy's sales, its same-store sales comparisons should brighten.
In the meantime, patient income-seeking investors are being treated to a 4.8% dividend yield, which looks quite sustainable with a reasonable payout ratio of just 50%. Likewise, Macy's is valued at only 10 times next year's estimated full-year EPS. This brand-name retailer has all the hallmarks of a clearance-rack bargain.
Qualcomm, Inc.
Technology behemoth Qualcomm (QCOM 1.43%) has also come under fire in recent months, largely because of antitrust lawsuits over alleged anticompetitive business practices. Qualcomm holds a massive amount of intellectual property patents that pertain to how wireless devices connect to networks. Should Qualcomm face financial penalties or lose some of its royalty power over these patents, it would certainly be bad news.
However, I'd opine that these worries, as with the other companies above, may already be factored into its share price. While it's possible that the investigations into Qualcomm's licensing practices could lead to fines, I don't believe it'll have a material impact on its patent pricing power over the longer term. More importantly, it overlooks two key growth drivers for Qualcomm.
Image source: Qualcomm.
First, investors shouldn't forget about data-driven demand pushing smartphone sales higher. After reaching an estimated 1.5 billion smartphones worldwide in 2016, shipments are expected to total 1.92 billion by 2020 according to IDC's Worldwide Smartphone Forecast. This compound annual growth rate of 6% gives Qualcomm and its high-end Snapdragon processors ample opportunity expand in the years to come.
Second, Qualcomm is in the midst of acquiring NXP Semiconductors (NXPI +0.56%) for $110 per share, or $39 billion when all is said and done. Assuming the deal gains regulatory approval in various countries, Qualcomm will have a front seat to the automotive chip market, where it'll be the biggest player. With automakers increasingly turning to driver assistance functionality, NXP and Qualcomm should see a long-term double-digit percentage growth opportunity. Not to mention, NXP's near-field communications chips that allow for short-range wireless device interaction gives Qualcomm another foot in the door with retailers and the Internet of Things.
Qualcomm's forward P/E of 11 seems reasonably inexpensive, and investors get to feast on the company's 4% dividend yield in the meantime. It's a bargain bin high-yield tech stocks that investors should have on their radars this winter.
