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Investors are having a hard time finding high yields in the usual places (like bonds) because interest rates are still at historic lows. As a result, some are turning to dividend stocks, for now, because the right ones offer up a great hedge against inflation. This is particularly true for dividend stocks with yields of 5% or more but also payout ratios below 52%.
To be even more discerning, let’s add one more requirement. These dividend stocks have to be cheap (when purchased), with trailing price-to-earnings (P/E) ratios below 10. These are the kinds of dividend stocks that pay you while you wait for their share prices to rise.
Where can you find such stocks? Perhaps surprisingly, the three we are going to discuss today are hiding in plain sight and are companies you likely have heard of: Dow Inc. (NYSE: DOW), Verizon (NYSE: VZ), and Western Union (NYSE: WU).
Image source: Getty Images.
1. Dow Inc. keeps getting better
Dow Inc.’s main operation is Dow Chemical, which produces various chemicals, plastics, synthetic rubber, resins, Styrofoam, as well as pesticides and genetically modified seeds. Its stock is down roughly 3% for the year, but that decline has made the chemical company’s stock even more of a bargain with a P/E ratio of 6.9. Thanks to its generous dividend, Dow has given its investors a total return of 27.73% over the past three years since the company spun off from Dupont.
Even better, the company has been able to grow revenue and net income this year. In the third quarter, Dow reported $14.8 billion in revenue, up 53% year over year and 7% sequentially. Net income was listed at $1.7 billion, up from a loss of $28 million in the same quarter a year ago, and earnings per share (EPS) were $2.33 in the quarter, compared to -$0.04 in the same reporting period last year. Admittedly, some of those gains were a result of comparisons to a pandemic-plagued 2020.
The company’s quarterly dividend of $0.70 per share generates a current yield of 5.25%. The dividend has room to grow as it is plenty safe, with a cash-dividend payout ratio of 45.03%.
2. Verizon’s big dividend is calling investors
Telecom conglomerate Verizon has seen its stock fall nearly 14% this year as it invests heavily in expanding its 5G network and deals with increased competition. But that drop provides an opportunity to buy this dividend stock at a reasonable price. The company’s P/E ratio is 9.4, well below the telecom wireless industry average of 24.68.
Verizon has raised its dividend for 15 consecutive years, including a bump of 2% this year to $0.64 per quarterly share, giving it a yield of 5.02%. Over the past three years, the company has raised its dividend by 6.46%, yet its cash-dividend payout ratio is sustainable at 45.5%.
Its ability to generate positive free cash flow makes it easier to increase its dividend regularly, even as it works to pay down debt. In Q3, the company reported revenue of $32.92 billion, up 4.3% year over year, and net income of $6.6 billion, up 45.5% over the same period in 2020. The company has increased net income in each of the past four quarters. Verizon also reported EPS in Q3 of $1.55 compared with $1.05 in the same period last year, a 47.6% increase.
The rise in 5G technology is helping pave the way for more wireless sales and bigger margins for Verizon. Over the past three years, it has increased its profit margin by 38.37%.
WU Cash Dividend Payout Ratio data by YCharts
3. Western Union has a message for you
Financial services company Western Union’s shares are down roughly 17% for the year, providing an opportunity to buy the stock at a relative discount. Western Union’s P/E ratio is 9.2. You would think the company was struggling based on its falling share price, but that’s not the case. This leader in global money movement and payment services is just still in recovery mode from the pandemic, which forced many of its retail locations to temporarily close.
Signs of that recovery were seen in Q3, when the company reported revenue of $1.3 billion, up 2% year over year. The recovery has been slower than management hoped (thus the stock price issues), but what Western Union lacks in growth, it makes up for with consistent positive cash flows.
The company’s customer-to-customer segment still brings in the majority of the company’s revenue, but its other two segments saw more growth, with business solutions up by 31% year over year and digital up by 15%. The company reported EPS of $0.57 in the quarter compared to $0.55 in the same quarter last year. The company also adjusted its yearly guidance upward, saying it expects EPS between $1.82 to $1.92 compared to earlier estimates of between $1.90 and $1.85.
Western Union has increased its dividend for seven consecutive years and, raised its dividend 17.5% over the past three years. This includes a bump of 4% this year to a quarterly per-share dividend of $0.235, giving it a yield of 5.10%. The company’s cash dividend payout ratio of 51% means the dividend rate is sustainable with more potential for growth.
The company has a huge international reach and is still the biggest name in money transfers. The growth in migrant populations across the globe will continue to drive business for Western Union. Last month, the company announced a partnership with Mastercard to expand Mastercard Send’s integration into Western Union’s global money-movement network, which will hopefully spark accelerated revenue growth.
Cheap isn’t always a negative thing
All three of these stocks are solid value plays that reward income-oriented investors with attractive dividends. Of the three, I like Dow the most because it has the highest dividend yield, lowest P/E ratio, and lowest cash-dividend payout ratio. It also had the most revenue growth of the three companies this year.
Verizon is also attractive because it too is underpriced with a safe dividend payout ratio. Of the three, it has the longest history of raising its dividend. Western Union’s higher payout ratio concerns me a little but payout ratios generally don’t raise real red flags until they exceed 70% to 80%. If the company’s digital initiatives take hold, the ratio is more likely to drop than rise.
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Jim Halley owns DOW. The Motley Fool owns and recommends Mastercard. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
