I’ve said it before. I’ll say it again. Short-term volatility is a long-term opportunity. Another way to look at it? Short-term pain is long-term gain. Why?
Well, if a stock is worth, say, $100, being able to buy at $90 is great. But if the pricing collapses to, say, $60, all else equal, that’s even better!
Stocks are a weird thing where people tend to want them less when prices go down. Conversely, people want to chase them after the prices have shot higher.
But successful long-term dividend growth investors operate in a way that’s completely opposite to this.
They get excited when prices are below value, and they get even more excited when pricing drops further below value.
After all, lower prices should result in higher yields, greater long-term total return potential, and reduced risk.
And since business value doesn’t move as fast as stock pricing can, short-term collapses in pricing can sometimes present excellent long-term opportunities.
Today, I want to tell you about five dividend growth stocks that are down more than 20% from their recent highs. Ready? Let’s dig in.
The first stock I have to highlight is Bank of America (BAC).
Bank of America is a multinational financial services company with a market cap of $291 billion.
Want to invest like Warren Buffett? Well, here’s your chance. Buffett has invested billions of dollars into Bank of America. In fact, it’s one of the largest single positions within the $325 billion common stock portfolio he oversees for his conglomerate, Berkshire Hathaway. It’s clear that Bank of America is one of Buffett’s favorite businesses, and it’s definitely his favorite bank. Why not? It’s run by a great CEO. The last decade has been remarkable in terms of the turnaround and growth across all areas of the business. And we all know that Buffett loves a big, growing dividend.
The bank has increased its dividend for eight consecutive years.
I touched on the turnaround just a moment ago. Around the time of the Great Recession, Bank of America was kind of a mess. But CEO Brian Moynihan has executed a stunning improvement in operations, and that has translated over to the dividend. The five-year DGR is 25.6%, which is impressive. And the stock also offers a very decent yield of 2.3%. With a payout ratio of 52.4%, the dividend is secure and positioned for continued growth.
Buffett’s favorite bank is down 28% from its recent high.
The 52-week high of $50.11 is long gone, with the shares currently trading hands for around $36/each. Almost every basic valuation metric here is showing at least some mild undervaluation, relative to where things have typically been at, on average, over the last five years. The P/E ratio of 10.3 is well off of its own five-year average of 13.7. The P/B ratio of 1.2 is in line with its own five-year average, and that’s a very reasonable P/B ratio. Most large banks have P/B ratios between 1 and 2. We’re on the lower end here. This big dip could be your chance to jump into Bank of America and invest alongside Warren Buffett.
Next up, let’s talk about Best Buy (BBY).
Best Buy is a North American consumer electronics and appliances retailer with a market cap of $18 billion.
Probably not a surprise to see Best Buy on this list. This was one of those companies that saw some pull-forward in sales, as the stay-at-home and home renovations trends led to higher sales of electronics and appliances. That led to a skyrocketing stock price for a short time. But the stock might have gotten ahead of itself, especially with only so many sales that can be pulled forward, rising rates, and inflation all taking a bite. That said, this business remains solid for the long term. And that goes for its dividend, too.
This retailer has increased its dividend for 19 consecutive years.
You don’t grow your dividend for nearly two decades in a row by running a poor business that can’t manage economic cycles and uncertainty. The dividend metrics here, by the way, are surprisingly good. The stock yields 4.4%, which is electric utility territory. Then you pair that with a 10-year DGR of 15.8%. It’s not every day that you see a 4%+ yield and a dividend growth rate of over 15%. Plus, the low payout ratio of 39.1% indicates no trouble at all here with the dividend or the continued growth of it.
This stock is down 44% from its recent high. Talk about a collapse!
That’s right. The stock’s 52-week high is $141.97. We’re now looking at a business going for $79/share. Huge drop. Now, should the stock have ever been up where it was? Maybe not. But the market acts like a pendulum when it comes to pricing. It can swing way too far to one way or the other when optimism or pessimism starts to take over and things get too extreme. I’d argue just like Best Buy was overpriced before, it’s underpriced now.
We analyzed and valued the business earlier this year, and the estimate for fair value came out to $122.13/share. And that was before the company increased the dividend by more than 25%! Price can move way faster than value. In this case, I think it’s moved too far to the downside in way too short of a period. Best Buy could be one of the best buys in the market.
The third stock I want to mention today is Cisco Systems (CSCO).
Cisco is a multinational technology conglomerate with a market cap of $188 billion.
This is an old-school tech company that flies under the radar. Nobody gets excited about Cisco. Nonetheless, the company is involved in providing the products that make up the backbone of modern tech infrastructure, like switches and routers. And they make gobs of money by doing so. Cisco is doing more than $50 billion per year in revenue, and FCF is coming in at around $14 billion per year. All of that has put them in a position to richly reward shareholders with buybacks and a fat, growing dividend.
The tech company has increased its dividend for 12 consecutive years.
With a 10-year DGR of 23.4% and a yield of 3.4%, you’re looking at a monstrous combination of yield and growth here. Unfortunately, however, the dividend growth rate has shown some serious deceleration of late. The five-year DGR is 8.2%. And the most recent dividend increase was less than 3%. Still, you’re getting a yield that’s more than twice as high as what the market gives you. And the payout ratio is only 53.3%. So it’s a very safe dividend. I’d like to see dividend growth get back to a high-single-digit range, but a 3.4% safe yield is nothing to shake your head at in this market.
This stock’s 29% drop from its 52-week could be overdone.
Now, this is another case where the stock may have gotten ahead of itself when it was at its 52-week high of $64.28. But down here at $45/each, shares are looking cheap. Every basic valuation metric is below its respective recent historical average. Take that 3.4% yield, for instance. It’s 50 basis points higher than its own five-year average. The P/E ratio of 15.9? That’s very, very undemanding. Look, I don’t expect Cisco to blow me away in any quarter. But the stock is priced for low expectations after its near-30% fall. Cisco is worth at least taking a look at right now.
I now want to bring to your attention Digital Realty Trust (DLR).
Digital Realty Trust is a data center real estate investment trust with a market cap of $38 billion.
When a lot of people think of real estate, they might conjure up images of houses, apartment buildings, and stores. Well, there’s a lot more to real estate than that. Think warehouses, cell towers, and data centers. That brings me to Digital Realty Trust. This is one of the world’s largest data center real estate companies. And with data becoming increasingly important and valuable, that only serves to make this REITs offerings more important and valuable. That, of course, bodes well for the REIT’s dividend.
The data center REIT has increased its dividend for 18 consecutive years.
The 10-year DGR is 5.4%, and that’s something they’ve been pretty consistent with. Meantime, the stock yields 3.6%. Is that the best combination of yield and growth in the whole market? No. But it’s not bad at all, especially for income-oriented investors who do lean a bit more toward the yield side of things. Based on midpoint core funds from operations per share guidance for this fiscal year, the payout ratio is 71.3%. That’s right in line with what I’d expect for a REIT, which indicates a sustainable dividend set to continue growing at that mid-single-digit rate.
This stock’s 24% drop from its recent high has created a very reasonable valuation.
At the 52-week high of $178.22, the valuation wasn’t super compelling to me. But we’re now looking at shares that are trading hands for about $135 a piece. This severe drop in pricing has, of course, reset the valuation. And it now looks like a very reasonable valuation. The 3.6% yield is 30 basis points higher than its five-year average.
Based on that aforementioned guidance, we’re looking at a forward price-to-funds-from-operations ratio of 19.7. Being somewhat analogous to a P/E ratio on a normal stock, that’s not egregious at all. The stock could drop more, certainly. But it actually does look buyable here, whereas it didn’t look buyable at the 52-week high.
Last but not least, I want to bring to your attention Medtronic (MDT).
Medtronic is a global medical devices company with a market cap of $127 billion.
So I mentioned earlier that it’s not a surprise to see Best Buy on this list. On the other hand, I am surprised to see Medtronic so weak. I say that because it wasn’t a beneficiary of the pandemic in terms of a pull-forward of sales that sent the stock artificially and temporarily skyrocketing. It was actually the opposite case for Medtronic.
Because of global healthcare’s focus on the pandemic, a lot of treatments that would have involved Medtronic’s products were delayed. This stock never got into a bubble in the first place, which makes its fall all the more compelling on a relative basis. And this fall has also made the dividend look more compelling.
The medical devices company has increased its dividend for 45 consecutive years.
This vaunted Dividend Aristocrat gives it all to you. Want a prestigious dividend that’s sacrosanct. Well, 45 consecutive years of dividend increases oughta clue you in there. Want yield? Okay. The stock yields 2.9%. That blows away what the market gives you, and it’s 80 basis points higher than its own five-year average. Want growth? Yep. The 10-year dividend growth rate is 10%. Want safety? The payout ratio is just 48.7%, based on midpoint adjusted EPS guidance for this fiscal year.
This Dividend Aristocrat has had a stunning 30% fall from its 52-week high. And I think it’s now seriously undervalued.
I call the stock’s 30% drop stunning because it didn’t even look all that expensive at the 52-week high of $135.89. But at the current price of $95.50/share, the business looks downright cheap now. Every basic valuation metric is showing inexpensiveness. That includes the forward P/E ratio, which is sitting at 17.1, based on the aforementioned guidance. We’re actually putting together a full analysis and valuation video on Medtronic. I’m getting the content on my end done as I speak. So stay tuned for that. Meanwhile, if you haven’t yet put Medtronic squarely on your radar, now might be a good time to do that.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
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Source: DividendsAndIncome.com