Undervalued Dividend Trio

04/14/2014 9:00 am EST


Marshall Hargrave

Contributing Editor, Wyatt Investment Research

One simple dividend strategy involves focusing on stocks that are yielding more than the 10-Year US Treasury while also trading cheaply from a P/E to growth (PEG) standpoint, explains Marshall Hargrave in Daily Profit.

Market leading companies remain great ways to find "safe" dividend paying stocks, but every once in a while, the market presents an opportunity to buy these stocks at very attractive prices. That's what's happening with these three dividend stocks.

Dow Chemical (DOW)

Dow Chemical is definitely an "unsexy" business. Even still, billionaire activist investor Daniel Loeb and his Third Point hedge fund have a large stake in the chemical company, hoping to shake up the company structure.

In an effort to fight off Loeb, Dow Chemical recently tripled its share buyback program and upped its dividend payment by 15%.

Dow has paid a dividend for over thirty years. It's currently paying a 3% dividend yield. Plus, with a trailing P/E ratio of 13, the stock is the cheapest among major peers.

With a payout ratio that's only 37%, Dow has plenty of cash to fund its dividend program. Additionally, the company's balance sheet is rock solid, with cash equal to nearly 10% of its market cap.

Lorillard (LO)

The tobacco companies are cash flow generating machines. While Lorillard is less well-known than its peers, it's the market leader in menthol brand cigarettes. And it also has a strong presence in electronic cigarettes—owning over half the market with its Blue e-cig brand.

There's speculation that Reynolds American (RAI) and Lorillard could merge. A marrying of two of the largest tobacco companies would be a big positive for shareholders.

Synergies for the deal could be as high as $400 million, which is just under 10% of Lorillard's revenues. This would be money that investors would no doubt see, either via dividend increases, or additional share repurchases.

The stock trades at a reasonable 15-times EPS estimates for 2014, has a 4.7% dividend yield and its balance sheet is one of the best in the business, with nearly $5 billion in cash.

Ford (F)

Ford reinstated its dividend in 2012 and is already offering investors a 3.3% yield. That's only a 23% payout, so there's plenty of room for management to double its dividend payment over the course of a couple of years. Earlier this year, Ford increased its dividend payment by 30%.

Meanwhile, shares of Ford are cheap, trading at just nine times trailing EPS. Ford's PEG ratio makes the company a cheap auto stock that is offering an impressive dividend.

While no investment is a sure thing, buying undervalued dividend stocks helps build in some downside protection. You'll be able to collect dividends, and the low valuations of these stocks should lead to capital gains.

Simply put: buying inexpensive stocks that have a history of rewarding shareholders is a great way to build wealth.

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