Growth Stocks are Floundering and Value Stocks are in Favor. And These 3 Dividend Payers Look Particularly Attractive.
Dividend-paying value stocks are a good place to turn in a risky market. And this is a time in the market of mounting risks.
There is the trade war with China, a flagging global economy, slower growth at home and impeachment. At the same time it is the oldest bull market and recovery in history and market indexes are very close to historic all-time highs.
It’s hard to love the market right now. But then again, this has been an unloved bull market for just about the whole 10 years. Why has it persevered? A main reason is this simple fact: money has nowhere else to go but stocks to earn a decent return.
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The bull market has had some rough patches. Things have gotten scary at times. But when the fear inevitably wanes investors realize that the stock market is the only game in town, with interest rates near historic lows. The main saving grace for the entirety of this bull market still very much applies today.
But lately investors have been treating just a small part of the overall market as the only game in town. For quite a long time stocks that have been performing well continue to be favored by investors, despite having gotten overpriced, while underperformers continue to languish.
How long will investors continue to pay through the nose for momentum stocks while ignoring those stocks with prices that actually reflect the current risks?
While value stocks, those that sell at relatively low valuations, outperform growth stocks over the long term, growth and momentum stocks have obscenely outperformed value over the past five years. At some point investors will adjust. They always do. In the meantime, certain low-priced companies are not only poised to thrive when market rotation shifts, but should also hold up better if the market turns south, as they are already beaten up.
I found three dividend-paying value stocks that I like right now.
3 Dividend-Paying Value Stocks to Buy Now
Dividend-Paying Value Stock #1: Altria (MO)
The stock of this cigarette maker is trading 40% below its 2017 high. It hasn’t traded this low in more than five years: it’s selling at a forward price/earnings ratio of 10, about half the five-year average. Meanwhile, the price dip has raised the current dividend yield to a stratospheric 7.16%.
Of course, the stock isn’t down just because the market has turned a blind eye to value stocks. There are some good reasons the stock is this low.
Recently, cigarette volumes have been decreasing at a higher rate, primarily due to the popularity of e-cigarettes as a substitute. To generate growth as an offset, Altria purchased a 45% stake in marijuana company Cronos (CRON) and a 35% stake in number one e-cigarette maker JUUL.
But the two stakes are having a miserable year. Marijuana has fallen out of favor with investors and e-cigarettes are in the news every week facing the ire of regulators. It’s unclear if regulators will even allow e-cigarettes to be sold in this country any longer. Altria also recently canceled a planned merger with former spinoff Philip Morris International (PM).
Here’s the thing: If e-cigarettes don’t work out, people will smoke more tobacco. If they do, Altria will have a powerful growth catalyst. Altria has them coming and going. It’s also worth noting that this is a company expected to grow earnings 8% in 2019. It’s not bleeding to death. It could actually be an even better company with its ancillary businesses in the future. And the 7% yield should be solid as this company has never cut the dividend.
Dividend-Paying Value Stock #2: AbbVie Inc. (ABBV)
This is one of the very best large pharmaceutical companies in the world. At the same time, the aging population is creating a massive tailwind for companies that provide cutting-edge health care. This company should prosper very well over the longer term. It’s the short term that is the problem.
The stock is down 38% from the early-2018 high and roughly 5% so far this year. The company has grown on the strength of its number one drug, Humira, which accounts for nearly 60% of revenues. That drug is facing competition overseas and will face the same as patents expire in the U.S. starting in 2023. The market is scared AbbVie won’t be able to replace the falling revenue.
But AbbVie has one of the best pipelines of future drugs in the business. In my view, the company has enough firepower to offset falling Humira sales, which will still remain strong well into the next decade. The company also merged with Allergan (AGN), a company about half its size. That merger should also decrease the company’s dependency on Humira.
The market is cranky right now. It is factoring in a near-worst-case scenario on all fronts. But AbbVie is a good bet to make. And even if the share price lags, the 5.59% yield provides a nice cushion.
Dividend-Paying Value Stock #3: Chevron (CVX)
Energy has been the worst-performing sector of the market for the last five years, three years, one year, year-to-date and three months. But it can’t stay in the doghouse forever.
Chevron is one of the world’s largest integrated oil and gas companies with operations throughout the world. The company is involved in virtually every facet of the energy industry but is heavily skewed toward oil and gas exploration and production.
I like Chevron more than the other oil majors because it has strong exposure to the Permian Basin, the largest shale oil producing region in the United States and the fastest-growing oil region in the world. According to global information provider HIS Markit, output from the Permian Basin should double between 2017 and 2023. At that point this region as a nation state would be the third-largest oil producer in the world, behind only Russia and Saudi Arabia. And Chevron’s volumes should grow with it.
The company has adjusted to the tough energy environment and cut the cost per barrel of production from $18 in 2014 to about $10 today, making it one of the lowest-cost producers. Meanwhile, CVX stock has performed on par with the overall market at a time of falling oil prices and horrible industry performance, and offers a solid 4.1% dividend yield.
Think what the stock could do if circumstances improve.
Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.Learn More
*This post has been updated from an original version.