Buy Alert: These 5 Undervalued Blue Chip Dividend Stocks Are Gaining Momentum
Summary
- The S&P 500 has shot straight through 4,000.
- Talking heads are now calling markets expensive.
- But if you know where to look, there is always something worth buying.
- Looking for a portfolio of ideas like this one? Members of The Dividend Freedom Tribe get exclusive access to our model portfolio. Learn More »
Life is not fair, get used to it - Bill Gates
Written by Sam Kovacs
Introduction
Life isn't fair. We'd all be well served to take Bill Gates advice when investing in stocks, and get used to it.
If prices were "fair" and reflected the true value of the companies, then the mid-20th century economists from Chicago would have had their way. Markets would be efficient, we'd all have access to the same information, we'd all make rational decisions, and any arbitrage opportunities would be priced away so fast, that our best chance would be to just buy a broad S&P 500 ETF (SPY).
But life, prices, and markets are not fair.
Bad companies get rich valuations. Good companies get discarded and priced cheaply. To the lay onlooker, it might seem as all of this is random. Academics also got fooled by this, presenting the idea that returns were due to a "random walk" of news.
But to the astute observer, nothing is new under the sun. Seasons change and return, cycles boom and bust, people are born and die, and prices go up and down.
If you take the thick rimmed glasses the founder of Microsoft (MSFT) is wearing in our intro photo, the style was all the rage in the '50s and '60s, before dying out in the '70s, coming back in vogue in the '80s, dying out in the '90s, before making a comeback last decade.
This cyclicality is best described by legendary investor Howard Marks, founder of Oaktree Capital (OAK):
I think it's essential to remember that just about everything is cyclical. There's little I'm certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don't grow to the sky. Few things go to zero. And there's little that's as dangerous for investor health as insistence on extrapolating today's events into the future.
An astute investor will realize that there are buying seasons and selling seasons for stocks. These seasons can happen at the company, industry, sector, or market wide level.
These seasons can be contradictory, or reinforcing. For instance, a stock can be cheap when the sector is expensive, or an industry can be cheap when the market is expensive.
The result is that, to quote whoever coined the phrase, "it is a market of stocks and not a stock market".
Or in other words, there is most likely always something to buy, and something to sell.
And even as a dividend investor, we make the most of this. We have our own approach at valuing stocks.
Our MAD Charts (Click here to learn more about MAD Charts) play a big part of understanding these cycles. Stocks go from overvalued to undervalued and back, relative to their historical ranges of dividend yields.
Source: Dividend Freedom Tribe.
The chart above shows the MAD chart for AT&T (T). As you can see, the dividend has only grown at a very slow rate in the past decade. There have been some good times to purchase, and some good times to sell.
Refusing to sell is a risk you take at your own peril.
If we buy stocks when they are cheap to get the most dividends for our buck, then we should sell when they are expensive and get the most buck for our dividends.
This led me to writing two articles in March, in which I included a total of 15 dividend aristocrats which were so overvalued that one would have been better off selling.
You can read the articles (here, and here), but for simplicity purposes, here are the 15 stocks:
- Target (TGT)
- Caterpillar (CAT)
- Procter & Gamble (PG)
- Automatic Data Processing (ADP)
- McDonald's (MCD)
- Walmart (WMT)
- Lowe's (LOW)
- Clorox (CLX)
- S&P Global (SPGI)
- Emerson Electric (EMR)
- Stanley Black & Decker (SWK)
- Cintas (CTAS)
- Nucor (NUE)
- Cincinnati Financial (CINF)
- Beckton, Dickinson & Co (BDX)
Note that these are very high quality companies that for the most part fit into our dividend investing framework, only not at these prices. At these prices, I believe the best thing one can do is sell.
Source: Dividend Freedom Tribe.
All but CINF are up in the two weeks since the article was published, therefore my assessment of all these stocks still holds.
If you happen to agree, you might be asking where you can invest the proceeds of any sales.
5 undervalued & trending blue chips
Markets are rising again, and bargains are ever becoming fewer. But there is always something cheap.
Here are 5 stocks which are:
- Very high quality.
- Have superior dividend policies.
- Are undervalued.
- Are gaining momentum (a.k.a: might not be undervalued for long).
Altria (MO)
Robert just wrote an article titled "Don't miss the Altria bull market", and I agree with every word he says.
The whole article can be summed up by the following snippet:
In other words, through thick and thin, Altria makes money.
The sort of stock you'd expect to hold up well in a down market, especially if it was already trading at depressed values before said downturn.
Common sense, right?
Alas, to express the idea of French philosopher Voltaire, albeit in a more elegant way thanks to the richness of Shakespeare's language over the "langue de Moliere":
Common sense isn't so common.
It is very likely that Altria's multi-year bull market is over. From lofty valuations, it sunk to incredibly low valuations and is now making its way back to more sensible prices.
The pendulum swings one way, then it goes the next.
Despite being up 60% from its lows, MO is still extremely undervalued.
Let's look at the MAD Chart.
Source: Dividend Freedom Tribe
During the past 10 years, MO has yielded between 3.15% and 10.7%. The core 50% of the time it has yielded between 4% and 5.85%, with a median yield of 5%. Robert has a price target of $60 for the year, which would give the stock just shy of a 6% yield. The current yield of 6.7% is historically very cheap, with the vast majority of the past decade seeing lower yields.
Now if we believe that MO can grow the dividend at 2%, then a 5% yield becomes a reasonable yield. If we believe the dividend can only grow at 0.5%, which is an extremely low hurdle for MO to meet, then a 6% yield would still make sense. At the current price however, it remains a layup.
We run a quick back of the napkin test to value the attractiveness of a dividend stream. The idea is to answer the question: how much will I get in dividends in 10 years if the dividend grows at x% and I reinvest the dividends? This allows us to compare two different investments with different yields and growth expectations on apples to apples basis.
If an investment can generate 8% on the initial investment in 10 years, then we consider it to be a good income opportunity, if an investment can generate 10% on the initial investment in 10 years, then we consider it to be a great income opportunity.
With MO's 6.7% yield, even if the dividend grew only 0.5% per year for the next decade, it would still pass the test with flying colors.
A $10,000 investment in MO at 6.7% with 0.5% dividend growth and reinvestment at the current yield would generate $1,196 in dividends in 10 years, of which $529 would come from having reinvested dividends.
Source: Dividend Freedom Tribe
This goes to show how reinvesting high yielding dividend stocks can create a massive boost to a portfolio. I suggest reading our article "Beyond Growth: A High-Yield High-Kick" for more on this.
Broadcom (AVGO)
Chip companies are having the time of their lives. Our All Weather portfolios include a couple of them, one of which is Broadcom. The fabless chip seller has already seen 90% of its supply for 2021 been ordered as a global chip shortage has fueled extra purchases.
Normally, only 25% of the supply would be locked up like this.
The fear is that customers are ordering too many chips, by fear of a shortfall later on, and that this might lead to cancellations.
Broadcom CEO thinks the demand is real. He said "Our revenue reflects what's being consumed by end users."
Throughout 2020, I said that AVGO was extremely undervalued, and had a lot of upside.
The stock is up 40% since inclusion in our Hybrid All Weather portfolio. There is still more upside.
Looking at the MAD Chart for an idea of a decent price won't help much though.
Source: MAD Plus.
Since AVGO spent the first half of the past decade yielding a very low amount, often below 1%, the ranges are skewed. It is nonsensical to take the median yield of 1.8% and proclaim that it is a fair price for AVGO. A much better approach as a dividend investor is to take our dividend growth expectation and use those to indicate what yields would make sense.
In the past 5 years, AVGO grew the dividend by 49% per annum. That's not a typo. Can we possibly believe they will do this again? While I certainly wouldn't mind it, I won't count on it. Last year the dividend increased by "only" 10%, and at 54% FCF payout, the most I could ever see AVGO growing the dividend over the next few years would be 20% per annum, and even that seems to be a stretch.
Let's use a base case of 10% dividend growth. It is our experience that dividend stocks which can grow the dividend by 10% per annum still offer decent investment opportunities when they yield at least 2.5%. If AVGO can get to 12% dividend growth, then a 2% yield would be warranted. If they can do 20%, then why not make it all the way down to a 1.8% yield.
As yields go down, the required dividend growth rates go up exponentially. So how do we look at this? We take the conservative road of course. Let's plan for 10% dividend growth.
Applying a 2.5% yield target would give AVGO a "fair price" of $575, or just about 20% higher than the current price. That's just the track between now and "still a good income opportunity".
If you invested $10,000 in AVGO at current prices, and reinvested dividends at the current yield, while the dividend grew at 10% per annum, you could expect $972 in income in 10 years, of which $226 would come from having reinvested dividends.
Source: Dividend Freedom Tribe.
This quick test places AVGO as a good income opportunity, very close to a "great income" opportunity.
Given the sectorial tailwinds, the shareholder friendly management, and the current valuation, AVGO is still an easy buy.
ONEOK (OKE)
ONEOK is another one of Robert's picks. One of them which got us exchanging awkward looks in March 2020, just 4 months after having published an article titled "Oneok: An Energy stock for all dividend investors". From the $71 level at which we initially bought OKE, the stock fell all the way down to $21.
We waited for the dust to settle, thought strong and hard about the whole macro situation which had everyone going nuts, and in May, Robert wrote an article which was quite bold:
"I'm down 55% and buying more of this 12% yielding stock".
We were told we were nuts, and that the dividend would be cut. We saw it as a possibility, but did not think a cut was highly probable, given management's commitment to paying its dividend.
And they made it work. Then in December 2020, when OKE had already climbed back nicely, Robert followed up with:
"Oneok is up 55% from lows, still yields 9% and has further upside".
OKE has climbed another 23% since then.
Thanks to our multiple purchases, we are now not only up double digits just on unrealized capital gains, but also up even more when you include the massive dividends we've received. Our December 2019 shares have already paid us over 10% in income.
Talk about making lemonade when life gives you lemons.
But here is the thing: OKE is far from down.
Its current yield of 7.3% is still nuts, given management has proven that its investment grade status has given the company to find financing to maintain the dividend in the hardest of times and can otherwise always generate enough cash to sustain the payment.
Source: Dividend Freedom Tribe.
There is no reason for the stock to yield more than 6%, and in fact, if it can grow the dividend at 2% per annum then there is no reason for it to yield less than 5%. (I think it'll grow at least by 5% per annum in the next decade, in which case the stock would warrant a 4% yield).
So at a base case we see $60 as a target, in the middle $75, and why not $90-$100 in a couple years if the dividend growth proves to be as good as I believe it might.
Humor me for a minute. Let's say that OKE does in fact grow the dividend at 5% per annum for the next 10 years, but that following my article, the market adjusts the price all the way up to the stock's 10 year median yield of 4.9%, and that the price continues to yield that much from here on.
If you invest $10,000 now, at 7.3%, that the dividend grows at 5% per annum, and that you reinvest dividends at the median yield of 4.9%, then in 10 years your investment can expect to generate $1,849, of which $643 would come from dividend reinvestments.
Source: Dividend Freedom Tribe
This is not a number I'm just throwing out there, it's a realistic scenario. High yield AND dividend growth is a fantastic cocktail, which as long as the dividend is safe, can do wonders for your portfolio.
I can't make the above statement, without stressing how important the second part of the sentence is. If the dividend isn't safe, it's all in vain, and is why in our Dividend Freedom Course, we included an article titled "Dividend Safety: The Most Important Thing".
OKE is an easy buy at current prices.
Unum (UNM)
We had some guy in the comment scoff at us when we suggested adding Unum to a portfolio back in October 2020. He was bragging about all the cash he was making in SPACs and how we were dumb for buying a widow's and orphan's stock.
The stock is up just shy of 70% since then.
Two weeks after we added to the portfolio, fellow SA author Chuck Carnevale wrote an excellent article on the company which summed up the buying thesis "Unum: Although Life And Health Insurance Companies Are Cheap, This One May Be The Cheapest".
In a nutshell: ultra-safe, shareholder friendly management who buys back shares, which enables further dividend growth.
Unum is still very undervalued.
The company has yielded between 1.34% and 10.38% in the past decade.
Can we just stop and reflect on this for a second? Investors go from believing a stock is so safe it should yield less than 2% one year, to thinking it is so unsafe it should yield 10% the next.
If you can still believe in efficient market theory after this, then please send me a message. It just turns out that I'm heir to a Hungarian aristocratic family, and that my wealth is held up, but that if you can Western Union me a small 5 figure advance, I'll be able to access the funds and will happily share them with you. (If you didn't get the joke... click here)
Unum has had a fair range between 1.8% and 2.8% with a median yield of 2.1% in the past 10 years.
Source: Dividend Freedom Tribe.
This seems quite reasonable for a widows and orphans stock which has grown the dividend at 10% per annum and pays out 39% of earnings.
If we believed it could do 10% again, a 2.5% yield would be our target for a fair price. I believe they can probably do 8% as soon as they resume dividend growth (probably this year). This sort of growth gives us a target yield of 3%, yet the stock still yields 4%.
But for the sake of being conservative, let's assume it takes a little longer for UNM to resume dividend growth, and that the CAGR amounts to 6% over the next 10 years.
In this case a $10,000 investment at the current yield with reinvestment of dividends at the same yield and 6% per annum growth would still yield $1,063 in 10 years.
Source: Dividend Freedom Tribe
This still passes our test as a "great" income opportunity, making UNM another easy undervalued buy.
South State Corp (SSB)
South State is a bank which we first recommended on the Dividend Freedom Tribe, and later in our recent article "We're buying banks hand over fist".
You can really have your pick of undervalued banks which are safe and trending. You do need to be careful, because high quality banks such as JPMorgan (JPM) or Bank of America (BAC) are fully priced now and should be held rather than bought.
South State is interesting because it is a very safe, high quality bank, which has the right geographical exposure (i.e.: the faster growing southern States) and a great management which has good M&A experience and is very shareholder friendly.
Source: Dividend Freedom Tribe
The stock yields 2.4%, which is well above its 10 year median of 1.65%.
It got such a low yield historically because during the GFC it did not have to cut its dividend, a feat that very few banks can brag about.
In the past 5 years, the dividend was growing at a very high pace, and I expect 12% growth in the next 10 years. This suggests a good income opportunity in SSB: a $10,000 investment with dividend reinvestment at the current yield would generate $914 in 10 years, between a good and great outcome.
Source: Dividend Freedom Tribe
In my article on banks I said:
It should also be noted that economic recovery, will lead to an easing of the fed's cap on dividends for banks. What do you think these shareholder-friendly, overcapitalized banks will do when the lid goes off?
They'll increase dividends.
If you believe in a return to normal scenario in the second half of this year, like I do, then along with energy, financials are a great place to be.
This will lead to large capital gains across the board. This quarter might be the last opportunity to pick up so many cheap bank stocks.
SSB is also a great buy.
Conclusion
It's a market of stocks, not a stock market. There is always something to buy, if you know where to look. There is usually something to sell, if you're being honest with yourself.
If you have the discipline to leave your biases out of the decision, you'll be well above the pack, and able to retire on dividends, a milestone we call "Dividend Freedom".
Want our list of 32 undervalued "Buys"?
We presented 5 ideas here, which will likely give a nice boost to your portfolio. But if you want to focus on value stocks, in a framework which also leads to a dividend rich retirement, you'll need more.
Members of the Dividend Freedom Tribe get our daily updated Buy/Watch/Sell lists, which cover over 100 stocks.
There are currently 32 stocks on our Buy list, enough to build a portfolio.
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This article was written by
Hi there! We're Robert & Sam, a dad & son team of dividend investors.
If you're looking for regular analysis of some of the best dividend opportunities, you're in the right place!
We regularly publish articles highlighting high quality companies, with superior management and dividend policies, which are trading at great prices.
Whether you're retired or still accumulating, we offer a path towards reducing risk while achieving strong returns.
We eat, breathe and sleeep dividend investing. We've poured thousands of hours of our lives into researching, creating original strategies, and developing tech solutions which make investing a breeze.
If you want to benefit from all of this, you should seriously consider trying "The Dividend Freedom Tribe", which includes a training course, three model portfolios, weekly in depth analysis, our buy/watch/sell lists, access to MAD Dividends Plus for free, as well as a community of lively dividend investors.
Contributing authors for The Dividend Freedom Tribe include Tomas Andrade Campanini and Mike Zaccardi, CFA, CMT
Analyst’s Disclosure: I am/we are long AVGO, BAC, JPM, MO, OKE, SSB, T, UNM. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (99)
You have been lucky with $UNM.
It's long term care liability exposure is a ticking time bomb.
That is why the share price was so depressed a while ago (relatively speaking)..
It has recovered somewhat, but the main problem still remains.
Not long ago (2016), NYCB cut it's dividends...so technically it's not a bluechip.
Another thing: The problem is I cant wait 5-10 years to get dividends increase to cover my RMD. Until last year RMD was practically fully covered by distributions from various REITs, BDC, and such. However, as you know, many of them because margin calls had cut drastically distributions. So, I'm leaning toward getting a mix of hi-growth stock, as AMZN, MSFT, GOOG, APPL , Asset Managers, as BX , BAM, KKR, IEP +financials C, AmEx, and so on. So, I'm eventually going to go with your HI yield portfolio, which is for the moment can't satisfy my RMD with distributions only. Any advice?
Yes, I agree with you. There is no source for it. Now I know it too.Since this saying was mentioned repeatedly in the articles by Chuck Carnevale, Dividend Sensei, and Dividend Kings in relation to Chuck, I mistakenly assumed that it was originally his own.But after my own unsuccessful search for a source on the original author, nothing was more natural than to ultimately ask Chuck personally.Unfortunately he couldn't tell me where this phrase originally came from, or who said it first. In any case, it wasn't him. In his opinion, it is also more of a principle than a quote, such as "buy low sell high" etc.It is also an old saying, but for him it is more of a descriptive phrase that suggests that not all stocks are the same. Finally, there are many nuance meanings that the phrase implies.Well, as I had already indicated, I wasn't sure. It's good that this gap has now been filled.I would like to take this opportunity to thank Chuck Carnevale again, who was willing to answer this question quickly and easily. Very appreciated.
Floyd