3 Cheap Dividend Stocks Yielding Up to 7.9%
3 High-Yield Stocks for Value Investors
The U.S. stock market has been enjoying a nice rally for more than eight years. All three major indices—the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index—have surged past their all-time highs. If you had a balanced portfolio and held it over these years, chances are you have made a quite handsome profit.
However, if you are in the market for some dividend stocks today, the more-than-eight-year bull market has brought a serious problem: nearly everything has gotten expensive.
When I say “expensive,” I don’t mean the absolute value of share prices. Instead, I’m talking about valuations.
You see, a company can be trading at $1.00 per share and still be expensive. And a company can have a stock price of $100.00 per share and still be cheap.
How is that possible? Well, it’s all about how much money you have to pay for each dollar of a company’s earnings. Therefore, a simple metric to tell if a stock is expensive or not is to take a look at the price-to-earnings multiple, also known as the P/E ratio.
For S&P 500 companies, the average P/E ratio right now is 25.45 times. So on average, investors are paying $25.45 for each dollar of S&P 500 companies’ earnings.
Is that expensive? Well, to give you some perspective, here’s a fact: the historical average of the S&P 500’s P/E ratio is 15.68 times. Therefore, investors today are paying 62.3% more than the historical average for each dollar of S&P 500 companies’ profits. (Source: “S&P 500 PE Ratio,” Multpl, last accessed November 30, 2017.)
Investors are also paying more for dividends than before. This is reflected in a drop in yields. Historically, S&P 500 companies had an average dividend yield of 4.37%. Today, the number stands at just 1.82%. (Source: “S&P 500 Dividend Yield,” Multpl, last accessed November 30, 2017.)
With higher valuations and lower yields, things have gotten much more difficult for value-conscious income investors. So in this article, I’m going to show you three companies that can make the job easier. They not only trade at much cheaper valuations compared to their peers, but pay generous dividends with yields of up to 7.9%.
3 Cheap Dividend Stocks
|Company Name||Stock Exchange||Ticker Symbol||P/E Ratio||Industry Average P/E Ratio||Dividend Yield|
|General Motors Company||NYSE||GM||9.48||16.74||3.53%|
|Gladstone Investment Corporation||NASDAQ||GAIN||8.02||14.62||7.19%|
|TC Pipelines, LP||NYSE||TCP||16.21||33.57||7.87%|
General Motors Company
General Motors Company (NYSE:GM) needs no introduction, given that it is the biggest player in America’s automotive industry. In the first 10 months of 2017, GM sold 2.45 million vehicles in the U.S., making it the market leader with a 17.2% share. (Source: “Auto Sales,” The Wall Street Journal, last accessed November 30, 2017.)
Of course, investors still remember the downfall of this Detroit, Michigan-based automaker about 10 years ago. The thing is, though, today’s GM is very different from what it was back then. Since the company got relisted on the New York Stock Exchange (NYSE) in 2010, it has remained profitable every single year.
GM stock has been enjoying a nice rally recently, climbing 18.2% in the last 12 months. However, despite the rise in its share price, the company is not really expensive. Trading at $43.09 apiece, General Motors stock has a price-to-earnings multiple of 9.48 times, significantly lower than the industry’s average P/E of 16.74 times. (Source: “General Motors Co (GM.N),” Reuters, last accessed November 30, 2017.)
The company has been raising its payout to income investors, too. Since General Motors resumed its dividend policy in 2014, it has increased its per share payout by 26.7%. At the current price, the company offers a decent yield of 3.53%. (Source: “Historical Dividends,” General Motors Company, last accessed November 30, 2017.)
Gladstone Investment Corporation
Gladstone Investment Corporation (NASDAQ:GAIN) is not just any cheap dividend stock, it is a cheap dividend stock that distributes every month.
Headquartered in Mclean, Virginia, Gladstone Investment Corporation is a business development company. It focuses making debt and equity investments in lower-middle-market businesses in the U.S., which tend to have annual earnings of between $3.0 million and $10.0 million. (Source: “Corporate Profile,” Gladstone Investment Corporation, last accessed November 30, 2017.)
As of September 30, 2017, approximately 70% of Gladstone’s portfolio is made up of senior secured loans to these businesses. This allows the company to earn a steady stream of interest income and pass it on to investors. The remaining 30% of its portfolio are invested in preferred stock and common stock of lower-middle-market companies.
Gladstone Investment pays monthly dividends of $0.065 per share, giving GAIN stock an annual yield of 7.19%.
Other than an impressive payout, the company also stands out due to its cheap valuation. Gladstone has a price-to-earnings multiple of 8.02 times. The industry it operates in, on the other hand, has an average P/E ratio of 14.62 times. (Source: “Gladstone Investment Corp (GAIN.OQ),” Reuters, last accessed November 30, 2017.)
TC Pipelines, LP
As the name suggests, TC Pipelines, LP (NYSE:TCP) is in the energy pipeline business.
Now, I know what you are thinking: “The energy sector is not in the best of shape. Why should income investors consider a high yield energy stock?”
Well, this is because TC Pipelines runs a fee-based business backed by long-term, ship-or-pay contracts. It can generate a stream of cash flow that’s stable enough to support a generous dividend policy regardless of commodity price movements.
Just take a look at TCP stock’s dividend history and you’ll see what I mean. Since TC Pipelines went public in 1999, the partnership has raised its payout every single year. (Source: “Distribution History,” TC Pipelines LP, last accessed November 30, 2017.)
Earlier this year, TC Pipelines raised its quarterly distribution rate to $1.00 per unit, translating to an annual yield of 7.87%.
Trading at $50.81 per unit, the partnership offers good value for the money. TCP stock has a price-to-earnings ratio of 16.21 times, which is more than 50% lower than the industry’s average P/E ratio of 33.57 times. (Source: “TC PipeLines LP (TCP),” Reuters, last accessed November 30, 2017.)