As we highlighted in an article earlier titled "It's Time To Buy...Not Time To Sell!", we believe that patient investors will be rewarded once again for "buying the dip".
Our investment plan is simple: Buy great stocks at good prices! And the current sell-off has already presented some fantastic opportunities in some great high-quality dividend stocks.
As a quick overview, we use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy them. For dividend stocks in particular, we have a proprietary rating system that ranks over 500 U.S. dividend stocks on a weekly basis. Our ratings are derived by ranking each stock based on 30 key fundamental and technical data points across four rating categories: (1) Dividend, (2) Safety, (3) Value, and (4) Momentum. This rating system helps us quickly screen for great stocks (i.e., stocks with high Dividend, Safety and Value ratings).
In addition, we scan the charts of our top-rated stocks daily looking for strong levels of support and resistance, which ultimately helps us determine a target "Buy Zone" for each stock. We believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results. We focus on four key levels of support when determining a "Buy Zone": (1) Key Technical Support, (2) Stock-Specific Volatility, (3) Valuation, and (4) Yield.
3 Dividend Stocks That Are Trading Lower Than They Should
The tables below summarize some of the key data points that we analyze when ranking our dividend stocks. These 3 stocks in particular have relatively high Dividend and Value ratings and we believe long-term dividend investors should consider purchasing them at current levels.
Caterpillar Inc. (CAT)
Founded in 1925, Caterpillar, the largest manufacturer/marketer of construction equipment worldwide, is also a leading manufacturer of diesel engines and turbines for transport and industrial applications.
CAT shares have been under pressure over the past few quarters due to several headwinds including oil/gas activity, continued weakness in mining, and a potential slowdown in North American construction on the back of weakness in oil/gas. That said, the stock is now down over 30% from its recent high and we believe that most of the bad news is priced in and that oil is likely to bottom in the $35-$40/barrel range.
CAT has a very high Value Rating of 97 as the company currently trades at a discount to several of its long-term average valuation multiples (P/Sales, P/Earnings, and EV/EBITDA). In addition, CAT has a Dividend Rating of 96 as it pays an above average dividend yield of 4.0% and has increased its dividend for 21 consecutive years. The company also has a relatively low payout ratio (43%) and we view the dividend as very safe despite the cyclicality in earnings. In fact, CAT just increased its dividend by 10% last quarter!
Qualcomm Inc. (QCOM)
Qualcomm designs, develops, and supplies semiconductors and collects royalties on wireless handheld devices and infrastructure based on its dominant position in CDMA and other related technology patents. In addition Qualcomm provides systems software to wireless handset vendors and promotes applications and services that run on high speed wireless networks.
QCOM shares have been under pressure over the past couple quarters due to lower than expected growth in the smartphone market and declining licensing revenue growth. That said, QCOM is down over 25% from its recent high and we believe that most of the bad news is priced into the stock. In our opinion, there is a lot of growth ahead for QCOM as the company is well positioned to capitalized on continued adoption of smartphones and tablets worldwide.
QCOM's current yield (3.1%) is now above the magic 3% number, and the company has been a solid dividend growth stock over the past 10 years, with a 10-year compound annual dividend growth rate of 23%! The company is dedicated to delivering value to shareholders through dividends and stock repurchases (returned over $7 billion of cash in FY 2014 alone). In addition, the company has a low payout ratio (<50%) and we believe that the dividend will remain stable in the future.
QCOM has very high ratings for Dividend Track Record (99), Safety (92) and Value (96) - and it is only one of two stocks in our entire universe that has 90+ ratings in these three categories! The company has a very strong balance sheet with low debt levels and over $35 billion of cash! We also believe that the stock is trading at a decent valuation (<14.0x FY15 EPS), which represents a 30% discount to its 5-year average ratio and it is currently trading in the low end of our Buy Zone ($60.00-$66.00).
Exxon Mobil (XOM)
Exxon Mobil Corporation explores for and produces crude oil and natural gas. The company has approximately 37,000 gross and 31,000 net operated wells. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene, polypropylene plastics, and specialty products; and transports and sells crude oil, natural gas, and petroleum products.
You can't talk about "value" stocks right now without mentioning some energy names. We think that oil prices are close to bottoming and it's time to start dipping your toe in water with some high quality energy stocks. XOM is one of our favorites in the space due to its broad diversification and its relatively stable cash flow.
That said, the stock is down almost 30%% from it's recent high due to declining oil prices. Although margins will fluctuate a bit with commodity prices, production should remain stable over the next few years and cash flow should remain strong. As long as the price of oil remains somewhat stable from here, we think that the stock will bounce back from current levels in the coming quarters.
Exxon Mobil has a phenomenal dividend track record (as highlighted by its dividend rating of 97) and a stellar current yield of ~4.0%. 2015 marked the XOM's 33rd straight year of increasing its dividend to shareholders and the company has increased its dividend at a compound annual rate of 10% over the past 10 years (including a 6% hike last quarter in the heart of the oil sell-off). Of all the energy stocks, we believe XOM's dividend is certainly one of the safest.
These are just three examples of some stocks that we believe offer dividend investors some great value at current levels.
Please make sure to "follow" us as we will be highlighting some specific stocks to consider (sector by sector) in a new series that we are launching over the next few weeks.
This article was written by
Disclosure: I am/we are long XOM, QCOM, CAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.