Is It Time To Buy These Dividend Stocks With High Cash Flows?

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 |  Includes: AXS, FITB, FULT, GSBC, HLSS, INDB, MHLD, USB, XRX
by: Kapitall

Summary

An expected increase in Treasury bond yields could lead investors to ditch dividend stocks for bonds.

When that happens, investors will replace dividend stocks, which are currently popular as the investment with the highest return, with bonds.

Higher interest rates may make it harder for some companies to increase or continue paying dividends.

However, companies with strong cash flows are better equipped to handle the higher rates while sustaining dividend payments.

Last week, a Barron's article argued that an expected increase in Treasury bond yields could lead investors to ditch dividend stocks for bonds. Yields on 10-year Treasury bonds were at 2.61% at 11:30 a.m. Monday morning, but Sam Stovall of S&P Capital IQ told Barron's that the research firm expects the yield to reach 2.9% by the end of the year and 3.3% by the end of 2015.

And when that happens, Stovall continued, investors will replace dividend stocks, which currently popular as the investment with the highest return, with bonds as they did in May 2013 following the announcement of the Federal Reserve's intent to taper its bond buying program.

Then there's the issue of the Fed raising interest rates in 2015. Higher interest rates may make it harder for some companies to increase or continue paying dividends, further diminishing their attractiveness in the eyes of investors. However, companies with strong cash flows are better equipped to handle the higher rates while sustaining dividend payments.

With this in mind, we ran a screen for investors intent on keeping dividend stocks on hand. We began with a group of stocks that are going ex-dividend this week. Next, we narrowed down that group to high dividend stocks with yields of 2% or greater.

Finally, we screened for stocks that are undervalued with a price to free cash flow (P/FCF) ratio below 15. This ratio divides market capitalization by annual free cash flow-the money a company can use to expand its business and pay dividends to shareholders-to determine whether a stock is under or overvalued. Free cash flow is the money a company has after subtracting its expenses, short-term and long-term investments, and taxes, and adding non-cash items. This cash can then be used to expand the business and pay dividends to shareholders.

Typically, the higher the free cash flow, the lower the P/FCF, so stocks with high cash flows are more likely to be undervalued. And in many cases, stocks with a P/FCF ratio below 15 can be considered undervalued. However, as always, variation between industries can be expected. We were left with nine stocks on our list.

Click here to see the full, interactive chart.

1. Axis Capital Holdings Limited (NYSE:AXS): Provides various insurance and reinsurance products to insureds and reinsureds worldwide. Market cap at $4.87B, most recent closing price at $45.16.

The stock has a dividend yield of 2.39%.

Ex-dividend date on Wednesday, June 26.

P/FCF at 5.55.

2. Fifth Third Bancorp (NASDAQ:FITB): Operates as a diversified financial services holding company in the United States. Market cap at $18.36B, most recent closing price at $21.59.

The stock has a dividend yield of 2.22%.

Ex-dividend date on Thursday, June 26.

P/FCF at 6.06.

3. Fulton Financial Corporation (NASDAQ:FULT): Operates as a multi-bank holding company that offers retail and commercial banking products and services in Pennsylvania, Delaware, Maryland, New Jersey, and Virginia. Market cap at $2.35B, most recent closing price at $12.45.

The stock has a dividend yield of 2.57%.

Click here for the full, interactive chart.

Ex-dividend date on Friday, June 27.

P/FCF at 11.13.

Click here to see the full, interactive chart.

4. Great Southern Bancorp Inc. (NASDAQ:GSBC): Operates as the bank holding company for Great Southern Bank that offers various banking products and services in Missouri, Iowa, Kansas, Nebraska, and Arkansas. Market cap at $415.9M, most recent closing price at $30.38.

The stock has a dividend yield of 6.76%.

Ex-dividend date on Thursday, June 26.

P/FCF at 4.97.

5. Home Loan Servicing Solutions, Ltd. (NASDAQ:HLSS): Participates in the acquisition of mortgage servicing assets through its subsidiaries. Market cap at $1.6B, most recent closing price at $22.54.

The stock has a dividend yield of 8.52%.

Ex-dividend date on Thursday, June 26.

P/FCF at 6.76.

6. Independent Bank Corp. (NASDAQ:INDB): Operates as the bank holding company for Rockland Trust Company that provides commercial and retail banking, and wealth management services in Massachusetts. Market cap at $911.07M, most recent closing price at $38.12.

The stock has a dividend yield of 2.52%.

Ex-dividend date on Wednesday, June 26.

Click here for the full, interactive chart.

P/FCF at 9.17.

7. Maiden Holdings, Ltd. (NASDAQ:MHLD): Provides non-catastrophe inland marine and property coverage reinsurance solutions to the regional and specialty insurers in the United States and Europe. Market cap at $873.47M, most recent closing price at $11.99.

The stock has a dividend yield of 3.67%.

Ex-dividend date on Friday, June 27.

P/FCF at 1.87.

8. U.S. Bancorp (NYSE:USB): Provides various banking and financial services in the United States. Market cap at $79.39B, most recent closing price at $43.74.

The stock has a dividend yield of 2.10%.

Ex-dividend date on Wednesday, June 26.

P/FCF at 7.27.

9. Xerox Corp. (NYSE:XRX): Engages in the development, manufacture, marketing, service, and finance of document equipment, software, solutions, and services worldwide. Market cap at $14.42B, most recent closing price at $12.35.

The stock has a dividend yield of 2.02%.

Ex-dividend date on Wednesday, June 26.

P/FCF at 7.08.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.