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Through most of September, the stock market has had a tremendous run. The S&P 500 is up 14.3% year-to-date. With this incredible run up of stock prices dividend growth investors must be very patient and thorough in their research and analysis to identify stocks trading at favorable valuations. For DGI investors, a great way to begin screening stocks in this environment is to look for stocks that have underperformed over this period. While it is important to note that not all underperforming stocks represent good values, by analyzing stocks and companies closely investors can identify sound investment opportunities.

Coach (NYSE:COH)

Coach is a luxury goods manufacturer known best for creating purses and other accessories has underperformed the S&P 500 by roughly 20% year to date. On a valuation basis, the stock is trading slightly below its 5 year average P/E ratio (15.99 current vs. 16.39 5 year average). COH has a 32.5% operating margin near the top of the industry. Over the next 5 years COH is expected to grow EPS 14%. COH has very low debt, and sports a current ratio above 2.5. With a dividend payout ratio of 27% and a current yield of 2.1% the dividend appears to have significant room to grow. Since initiating a dividend payment in June of 2009, the quarterly payment has quadrupled from 7.5 cents to 30 cents.

While COH has underperformed year to date dividend investors should hold out for a slightly better entry point. Shares dropped 4% on Friday to trade at $56.62, but investors should look to get into the stock at dips to or below $55. While the stock does not have a long dividend history, they have consistently raised dividends, and appear poised to maintain this streak.

British Petroleum (NYSE:BP)

BP is one of the largest oil companies in the world operating in all industry areas including: exploration, production, refining, distribution, and marketing. With operations in more than 80 countries, and 21,800 gas stations around the world the company generates revenue of more than $350 billion annually. Year to date BP shares are down 2.58%, and it has underperformed the broader market by nearly 17%. BP has a current P/E ratio of approximately 8, below the 5 year average of 8.72 and the industry average of 19.5. Earnings per share for BP are expected to grow just 2.5% over the next 5 years, but with a low payout ratio of 33% the dividend appears to be safe at this time.

BP shares have struggled this year and will continue to face headwinds from litigation related to the Deepwater Horizon Oil Spill in 2010. BP is not a typical dividend growth stock, having eliminated its dividend in 2010 in the wake of the oil spill. The dividend was reinstated in 2011, and increased 14% this year. In much the same way that GE (NYSE:GE) appears to be an interesting stock for DGI investors, in the wake of their own dividend cut, BP appears poised to continue increasing its dividend. On a pure P/E ratio basis BP appears significantly undervalued so that significant share price appreciation could follow any clarity on liability from litigation. While headwinds remain and the share price appreciation will likely take time, patient investors may be rewarded with substantial capital gains.

Johnson Controls Inc. (NYSE:JCI)

JCI is a leading provider of automotive interiors, as well as providing energy optimization services for facilities. While the S&P 500 is up 14.3% YTD, JCI shares are off roughly 10% from where they traded at the beginning of the year. JCI has a current P/E ratio of 11.5 significantly below its 5 year average P/E of 20. Along with this low P/E, JCI expects to grow EPS by 16.7% for the next five years. With a payout ratio below 30%, the dividend is well covered and may grow significantly in years to come.

Johnson Controls is not a traditional dividend growth stock either. The company froze its dividend payment in 2009, but has increased it in the years since. As the automotive industry continues to post strong sales JCI should benefit. With the low payout ratio and rapid projected earnings growth, JCI management may look to aggressively return value to shareholders with significant dividend increases.

Norfolk Southern Corp (NYSE:NSC)

NSC is one of the top rail operators in the U.S., serving the area east of the Mississippi river. Year to date shares of NSC have dropped nearly 11%, versus the 14.3% gain for the S&P 500. Much of this loss can be attributed to the last week of trading, where shares lost 13% in the wake of NSC issuing lowered Q3 guidance due to weak demand for coal shipments. Coal makes up about 31% of NSC revenue, however weak coal demand should not surprise anyone, as railroad operators have seen this taking place all year.

NSC is currently trading with P/E ratio under 11.1, significantly below the 5 year average of 14.1. NSC is projected to grow EPS by 14% over the next five years, and currently pays out just 30% of earnings in the form of dividends. Based on the current share price of $65, NSC sports a dividend yield of 3.08%, and has grown the dividend by an average of 14% over the past 5 years.

While NSC has suffered from declining coal revenues, much of this decline has been priced into the stock already. With the recent sell off in the wake of the company's announcement shares have become undervalued. At this time NSC represents one of the best buys on the market, and a great long term play for a dividend growth investor.

Conclusion

Underperforming stocks do not always represent great values. However, for investors willing to analyze companies closely to determine why companies are undervalued, and what the future prospects of growth are, underperforming stocks may offer investment opportunities amid a world of over priced stocks.

Source: 5 Underperforming Dividend Stocks Poised To Grow Dividends For Years To Come