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All Contents © 2020The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| December 12, 2018
‘Tis the season to go bargain hunting for stocks.
It might not feel like it, what with the Dow Jones Industrial Average having kicked off December by shedding nearly 1,200 points, but now is the time to do some holiday shopping in the market, especially in dividend stocks.
After all, as Warren Buffett likes to say, “Be greedy when others are fearful.” And the way the market has been behaving lately, it’s pretty clear that fear abounds.
The general retreat in share prices means valuations are down and yields are up. (Dividend yields and stock prices move in opposite directions.) That has made several large-cap, high-quality dividend stocks look mighty tempting.
The Standard & Poor’s 500-stock index currently trades at 15 times expected earnings, according to Yardeni Research. To find bargains, we scoured the broad-market index for large companies that trade for less than 15 times projected earnings. At the same time, we limited our search to dependable dividend payers with yields of at least 3%.
After taking long-term earnings growth forecasts and analysts’ opinions into account, the following five names stood out as bargain dividend stocks to buy now.
Data is as of Dec. 10, 2018, unless otherwise noted. Companies are listed alphabetically. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Analysts’ ratings provided by Zacks Investment Research.
Market value: $219.6 billion
Dividend yield: 3.9%
Analysts’ opinion: 10 strong buy, 1 buy, 5 hold, 0 sell, 0, strong sell
Weaker oil prices are weighing on stocks in the energy sector, and that has helped make shares in Chevron (CVX, $114.94) look like a bargain. Analysts at Credit Suisse continue to rate the stock at “Outperform” (buy, essentially), in part because of its “compelling relative valuation.”
In other words, CVX looks cheap versus competitors and the broader market.
Chevron, a component of the Dow Jones Industrial Average, was off 9.9% for the year-to-date through Dec. 10. The S&P 500 was down 2.3% over the same time frame. That underperformance has CVX trading at just 12.2 times expected earnings, according to data from Thomson Reuters – that’s less than the 15 forward P/E of the S&P 500.
Analysts expect Chevron’s earnings to grow at an average annual rate of 58% over the next five years, helped by what Jefferies analysts call its industry-leading position in Texas’s Permian Basin. The drop in CVX stock has pushed the yield on its dividend up to nearly 4%.
Market value: $58.9 billion
Dividend yield: 5.1%
Analysts’ opinion: 8 strong buy, 0 buy, 2 hold, 0 sell, 3, strong sell
Shares in Kraft Heinz (KHC, $48.27) – down 37% for the year-to-date and 10% in just the last month alone – may finally be too cheap to ignore. Analysts at Stifel sure think so. They rate KHC at “Buy,” citing the packaged food giant’s “robust earnings growth outlook,” valuation and hefty dividend yield.
Kraft Heinz trades at 12.9 times projected earnings. That’s an uninspired number despite the fact that analysts still expect earnings to increase at an average rate of 6.7% a year for the next five years. Add in the dividend yield of more than 5%, and KHC looks pretty tasty.
It also doesn’t hurt that Warren Buffett, CEO and chairman of Berkshire Hathaway (BRK.B), is a big fan of Kraft Heinz. With a 26.7% stake in KHC, Berkshire Hathaway is the food company’s largest shareholder.
Market value: $48.7 billion
Dividend yield: 4.6%
Analysts’ opinion: 13 strong buy, 0 buy, 5 hold, 0 sell, 0, strong sell
Occidental Petroleum (OXY, $64.44) is another beaten-down energy sector name sporting an attractive valuation and hefty dividend yield.
OXY stock was off 13% through Dec. 10, lagging the S&P 500 by more than 10 percentage points. But the downdraft has Occidental Petroleum trading at just 11.5 times expected earnings. And analysts project average annual earnings growth of 74% over the next five years – though much of that is front-loaded in the next couple of years – according to a survey by Thomson Reuters.
The red-hot earnings growth rate, hefty dividend yield and discounted share price make OXY look like one of the best energy stocks to buy for 2019.
Market value: $256.7 billion
Dividend yield: 3.0%
Analysts’ opinion: 5 strong buy, 1 buy, 3 hold, 0 sell, 1, strong sell
Pfizer’s (PFE, $44.40) stock is having an enviable 2018, but even they haven’t been immune to the market’s December plunge. True, shares in the pharmaceutical giant have gained 22% for the year-to-date through Dec. 10 … but they’ve also dropped 4% from their Nov. 30 peak.
Consider it an opportunity to buy a blue-chip stock on marginal weakness.
Pfizer, a component of the Dow, trades at just 14.3 times expected earnings. That’s cheaper than the S&P 500. Analysts expect PFE to generate average annual earnings growth of 7.4% for the next five years, according to data from Thomson Reuters.
Steady earnings growth and a reliable dividend help make Pfizer stock a darling of institutional investors. Indeed, the drugmaker is a top stock pick for mutual fund managers.
Market value: $240.8 billion
Dividend yield: 4.2%
Analysts’ opinion: 9 strong buy, 1 buy, 10 hold, 0 sell, 0, strong sell
Verizon (VZ, $58.27) is another defensive Dow stock that has delivered gains in 2018 but also has been nicked by the December selloff. Shares in the telecommunications giant are off more than 5% from a 52-week high hit on Nov. 20.
The retreat has VZ trading at just 12.2 times expected earnings, according to Thomson Reuters. That’s almost 19% cheaper than the S&P 500. Additionally, the drop in VZ stock has pushed the yield on the dividend up past 4%.
Steady earnings growth and a dividend that’s gone up annually since 2007 have helped make Verizon a top stock pick for analysts, hedge funds and mutual fund managers.