Undervalued dividend stocks can be one way to kill two birds with one stone. Notably, they provide two routes to returns: dividends and capital appreciation. When both are achieved simultaneously, they can be a powerful compounding force.
Not all dividend-paying stocks are good investments. Sometimes, there are risks to high dividend yield stocks, which may indicate signs of a troubled company with declining business prospects. Therefore, instead of screening for yield only, it’s crucial to evaluate the quality of the business and its trajectory.
So, the following dividend stocks are foremost quality businesses. They are established companies with attractive market positions and have robust balance sheets. Secondly, they have a tradition of paying out consistent dividends. Each of the three has paid dividends for at least 10 consecutive years.
Thirdly, these stocks are trading at a significant discount to intrinsic value. As of this writing, all are valued at single-digit forward price-to-earnings multiples. Looking at their prospects, the probability of meaningful appreciation is high, given the low starting valuations.
Bank of America (BAC)
Bank of America (NYSE:BAC) is one of the best banking franchises in the United States. Authorities consider it “too big to fail,” highlighting its importance to the U.S. economy. Notably, the stock has a stamp of approval from Warren Buffett, who maintains a substantial position in Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) portfolio.
BAC’s core banking business is the crown jewel funded by low-cost consumer deposits. As of the end of Q4 2023, it had average deposits of $959 billion. Additionally, it had over 36.7 million consumer checking accounts.
Despite its lucrative deposit franchise, it is one of the most undervalued dividend stocks. As of this writing, it trades at 10 times forward EPS. Also, the bank trades at a discount to book value, a key metric in valuing banks. According to Q4 2023 results released on January 12, the book value per share stood at $33.34.
In terms of dividends, Bank of America earned $3.10 per share in 2023 and paid out $0.92 in dividends. This was the 10th consecutive year of dividend growth, and BAC stock has a forward yield of 3.02%. What’s more, it has increased the dividend per share at an impressive rate, growing it at 11.24% annually over the last five years.
Today, the bank has the potential for substantial raises, considering its payout ratio is under 30%. These raises will come from continued earnings strength. Recent results showed growth in consumer banking from account growth. Similarly, global wealth and investment management saw $52 billion in asset inflows in 2023.
In 2023, the bank returned over $12 billion to shareholders. Given its tradition of consistent dividends, more payments are on the horizon. Buying BAC stock at a discount to book value today will earn you gains and a healthy dividend.
Verizon Communications (VZ)
Given the predictable nature of its wireless business, this telecom giant is a bastion of stability. It is one of the three major wireless carriers in the U.S., with a 28% market share as of Q3 2023. That’s why it’s no surprise that the company has grown its dividend for 19 consecutive years.
Today, Verizon Communications (NYSE:VZ) has one of the highest yields on the S&P 500 — 6.84%. Considering its forward P/E of 8, you have one of the most undervalued dividend stocks.
In 2023, VZ stock underperformed and rightly so. First, the company has undergone a heavy investment cycle over the last five years. It had to upgrade its 5G infrastructure and spent $45 billion on spectrum in the 2021 C-band auction. This heavy spending reduced free cash flow and had investors fleeing the stock. Then, the possibility of lead cable lawsuits hit, causing further weakness.
As we begin the year, there are several reasons to be optimistic about one of the most undervalued dividend stocks. First, analysts think Verizon’s infrastructure upgrade cycle is near its end. Therefore, with reduced spending, the firm will generate higher earnings and cashflows, which bodes well for the dividend thesis.
Also, after overreacting to the cable news, investors are reconsidering the potential impacts. Most analysts predict the financial burden from lead cable clean-up will be minimal. That means Verizon is well-positioned to generate robust free cash flow. At a 54% payout ratio, the dividend is safe and could even grow faster as cashflows accelerate.
HP (HPQ)
Over the last two years, HP (NYSE:HPQ) stock has been bogged down by a downturn in the PC market. Spending on workstations, laptops and other accessories has declined after abnormal demand during the pandemic.
Due to the downturn, HPQ stock has fallen precipitously over the last two years, presenting an attractive opportunity. PC demand might begin its recovery in 2024, and the stock might be foreshadowing this with a 12% rally since October 2023.
Buying the stock at these levels before the PC market recovery presents an attractive risk reward. As of this writing, the stock has a generous 3.85% dividend yield. Moreover, it has an impressive dividend record, with a 12.96% 5-year dividend growth rate. Having grown the dividend for 13 consecutive years, it is one of the undervalued dividend stocks you can rely on for income.
While you earn the quarterly $0.27 per share dividend, expect EPS growth going forward. The International Data Corporation (IDC) and Gartner expect a PC market recovery in 2024, which will be a catalyst for HP’s earnings. Also, the stock has the potential for a multiple expansion. Today, HPQ stock trades at an undemanding 8 times forward earnings.
Lastly, besides the PC recovery, artificial intelligence presents growth opportunities. New products integrating the technology could spur a refresh cycle moving the stock higher. For now, potential multiple expansions and a recovery in global PC shipments are catalysts for HPQ stock.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
