Affordable Dividend-Yielding Shares to Purchase and Maintain Long-term
Affordable Dividend-Yielding Shares to Purchase and Maintain Long-term
There are a couple of methods to consider when investing in a market at an all-time high. Some investors might opt to ride the wave higher or invest in high-growth stocks dominant in their sector. Alternatively, others might look for undervalued stocks, such as dividend stocks or value stocks, trading at more affordable prices.
For investors wanting to focus on dividend stocks, consider checking out Essential Utilities (WTRG -1.00%), Deere (DE 0.22%), and Owens Corning (OC -1.53%). These stocks may lack the glamour, but they make up for it with growing distribution yields and sensible valuations. Here's why these dividend stocks deserve your attention and commitment for the long term.
Quench your desire for an affordably priced high-yield dividend stock with Essential Utilities
Scott Levine (Essential Utilities): While the S&P 500 has skyrocketed by more than 20% this year, finding worthwhile stocks that aren't overpriced might be a challenge. Identifying promising dividend stocks that even trade at discounts can be even more formidable. Thankfully, investors need not look far beyond water utility Essential Utilities. Although the S&P 500 has substantially risen since the start of the year, Essential Utilities has merely ticked up by 3%. This provides income investors an excellent opportunity to purchase these shares at a price offering a yield of 3.4%.
Essential Utilities may seem less captivating than tech innovators exploring areas like artificial intelligence. However, for income investors, ordinary companies can be quite intriguing. The appeal of Essential Utilities lies in its stable, regular cash flows derived from providing water and wastewater services: Nearly 98% of its earnings stem from regulated businesses. This has allowed the company to maintain a 33-year streak of establishing annual dividend increases. And these boosts haven't been meager, either. From 2015 to 2024, Essential Utilities has amplified its dividend at a 7% compound annual growth rate.
With shares changing hands at 13 times operating cash flow, Essential Utilities proves to be a bargain, especially when compared to its five-year average cash flow multiple of 16.9. If you prefer to evaluate stocks utilizing the price-to-earnings (P/E) ratio instead, the stock also looks appealing at that metric, trading at a multiple of 19.2, which underscores its five-year average P/E ratio of 27.4.
Deere is a market leader with enticing value
Daniel Foelber (Deere): The industrial sector has experienced a remarkable 2024 so far, with sector ETFs like the Vanguard Industrial ETF hovering around their all-time highs. Regrettably, not every industrial stock has taken part in the rally.
Deere has slightly decreased in value this year, and its stock price has barely moved for the past three years despite the company reporting solid earnings.
Deere saw a surge in its stock price towards the end of 2020 and throughout 2021 due to the pandemic and Russia's invasion of Ukraine, which led to supply chain disruptions and soaring crop prices, resulting in heightened capital spending by Deere's clients. Although its sales and earnings have slightly dropped from their peaks, they are still considerably above their pre-pandemic levels.
Deere's impressive earnings and its stagnant stock price have pushed its P/E ratio down to a mere 13.4. However, for companies in cyclical industries, it's unwise to place too much emphasis on P/E, as their valuations will usually appear expensive during downturns and inexpensive during expansionary periods. Nevertheless, Deere's stock is currently so affordably priced that, if earnings were halved from their current level, it would still offer a discount compared to the S&P 500's average P/E ratio of 30.7.
Deere has a standout product portfolio, bringing solutions to the agriculture, forestry, and construction sectors, among others. It's indisputable that the company has long-term potential. The primary reason Deere's stock has been underperforming this year is its inability to forecast its short-term results accurately. On Nov. 22, 2023, Deere reported its full fiscal 2023 results, revealing a forecast of $7.75 billion to $8.25 billion in net income for fiscal 2024. Although this forecast was less ambitious than the $10.17 billion Deere earned in fiscal 2023, it was still impressive considering that the company had already worked through much of the pent-up demand from previous years.
Fast forward to Aug. 15, and Deere was suggesting only a $7 billion net income forecast for fiscal 2024. We'll learn how closely actual results align with this forecast when Deere reports its results on Thursday. However, investors might be taking a wait-and-see approach to Deere, in case management hints at a potential slowdown in fiscal 2025.
At the current share price, Deere's dividend yields a mere 1.5%, but it could effortlessly boost its payout if it didn't repurchase so much stock. Deere's capital return program uses both dividends and buybacks to reward shareholders. Over the past decade, Deere has increased its dividend by 145% and reduced its share count by 20.5%. Deere's payout ratio is just 19%, implying that if it gave all of its earnings back to shareholders through dividends, its yield would surge to over 7.5%. Another perspective: Deere's earnings could decrease by two-thirds, and it would still maintain a healthy payout ratio within the desired 50% to 75% range.
In essence, Deere's value as an investment stands out, given the current circumstances.
**John Doe(Owens Corning*): History has shown numerous instances of missed opportunities and unfortunate events related to investments, often due to weakness in specific end-markets. If a company is experiencing a temporary slump but management is optimistic about its long-term growth potential, the wisest course of action is to seize the opportunity and intensify your investment while others are deterred by fear.
Owens Corning, a player in the building materials sector, presents such an opportunity. Initially, the company was focused on roofing products, insulation, and composites, with a strong presence in the North American residential construction market. However, an opportunistic acquisition of Masonite, a doors company, in May expanded its reach. This move effectively enabled Owens Corning to strengthen its position in the housing market by providing all necessary roofing materials, insulation, and doors under a single roof. If Owens Corning manages to realize the $125 million in synergies it anticipates from the deal, it will have paid just 6.8 times its EBITDA for Masonite.
What's more, this company could also be a potential dividend growth stock. While its current dividend yield is only 1.2%, management has shown a propensity to increase the payout in recent years. Considering its robust free cash flow, there's potential for further dividend hikes.
The outlook for interest rates and the Fed's plans suggest a lower interest environment in the near future. This should bode well for the housing market, and if the housing sector recovers, Owens Corning's Masonite deal might well emerge as a strategic move of great significance. Given that the stock is trading at less than 13 times its estimated 2024 earnings, investing now could also prove to be a shrewd decision for investors.
For investors seeking undervalued stocks, they might consider investing in Owens Corning, which is currently trading at a price-to-earnings ratio of less than 13 times its estimated 2024 earnings. Some investors may prefer dividend stocks like Deere, which currently has a payout ratio of just 19%, implying a potential dividend yield increase if all earnings were distributed as dividends.
Investing in companies like Essential Utilities and Deere can provide a steady income stream, even in a challenging market. Essential Utilities, for instance, has maintained a 33-year streak of annual dividend increases, amplifying its dividend at a 7% compound annual growth rate since 2015. Deere, despite its current 1.5% dividend yield, has demonstrated long-term potential and often offers a discount compared to the S&P 500's average P/E ratio.