Top 3 Cheap Dividend Stocks to Buy for 2017

Don’t overpay for growth and yield just because the market is trading at all-time highs. These three dividend stocks offer cheap entry valuations and the chance for both share price and dividend growth in the New Year. 

Finding cheap stocks is tough these days.

Add finding solid, relatively high dividends to that equation and it can be next to impossible to solve.

All this comes as Wall Street’s top four markets, the Dow, NASDAQ, Russell 2000 and S&P 500, are simultaneously hitting all-time highs – the first time this has happened since 1999. All this is thanks to Donald Trump and the market becoming excited about his potential economic policies.

But Trump’s Presidential election win will also bring higher interest rates, which can be a negative for dividend paying companies as investors can then put their money in higher yielding bonds and Treasuries.

What’s more is that U.S. companies are scaling back their dividends; dividend payouts were down 7% last quarter. This was the worst growth since the financial crisis. Also, global dividend payouts dropped the fastest since mid-2015, since slowing earnings growth appears to be handcuffing dividend growth. Management teams are becoming cautious, which is making dividend investing infinitely tough in this all-time ‘expensive’ market.

Still, there are ‘cheap’ stocks out there. It takes some digging, but it’s worth doing. It also helps that some of the best cheap stocks we’ve found are also paying dividends that continue to grow.

With all that in mind, here are the top 3 cheap dividends for 2017:

Cheap Dividend For 2017 No 1: CVS (NYSE: CVS)

cvsCVS runs a number of walk-in medical clinics and pharmacies, and it is a pharmacy benefits manager with over 70 million members. Shares of CVS have tumbled over 30% from the $105 a share 52-week high we saw this past spring. From a stock price perspective, we haven’t seen CVS this cheap in nearly two years. This comes thanks to a weak earnings report that included a tapering of 2017 earnings.

It’s now trading at just 12 times next year’s earnings estimates, which puts CVS at a hefty discount from the 20 times we saw the stock trade for during most of 2015. Digging deeper, CVS trades at just 9 times free cash flow, compared to the 20-30 times range we saw from 2014-2015. The selloff appears overdone, as CVS did announce a hefty $15 billion buyback program, nearly 20% of its market cap. This should more than help offset the projected disappointment in 2017 earnings, a fact that much of the market might be overlooking.

CVS is paying out a 2.3% dividend yield and has upped its annual dividend for eight straight years. Plus, it has plenty of room to up that going forward, with a payout ratio of less than 30%.

Cheap Dividend For 2017 No 2: Cardinal Health (NYSE: CAH)

cahCardinal shares have tumbled 20% in 2016. Shares are now trading at 13 times forward earnings and less than 9 times free cash flow (FCF). At 9 times FCF, this is the cheapest Cardinal shares have been since 2010.The beauty of Cardinal’s business is that it remains low in terms of capital intensity but generates a lot of free cash.

Cardinal has gotten caught up in the political overhang that’s put pressure on the entire healthcare industry. As well, some weak earnings reports from competitors have also weighed on the stock.

However, unlike companies that make money raising drug prices, Cardinal acts as more of a distributor, supplying pharmaceuticals to pharmacies and hospitals. It has a large distribution network that provides a solid moat for its business. Lest we forget the 2.6% dividend yield, which is just a 33% payout of earnings. Cardinal also has an 11-year streak of consecutive dividend increases.

Cheap Dividend For 2017 No 3: Xerox (NYSE: XRX)

xrxXerox shares are down 10% in 2016, which comes even after announcing earlier this year that it would spin-off its services business. At around $9 a share, Xerox has fallen more than 35% from the $14 a share we saw in 2015. It’s now trading at just 8 times next year’s earnings estimates and 11 times free cash flow.

The key for Xerox heading into 2017 will be that it can focus on its core business. The company will complete the spinoff of its business process outsourcing operations as Conduent in mid-December. The idea is that these two very different businesses, which require different capital structure and operating models, will be best served as separate businesses. XRX is paying a 3.3% dividend yield and is only paying out less than 30% of its earnings via dividends. It’s upped its dividend for three straight years. The legacy Xerox business will remain a steady capital returns story, planning to return 50% of its free cash to shareholders.

In the end, the dividend investing environment is changing as we hit all-time highs in the market and remain on the cusp of a landmark dividend increase. Right now, the double whammy in the dividend investing space is to find safe dividends being offered by companies that are too cheap to ignore. Heading into 2017, you’ll get a solid dividend check and stock price appreciation as the market realizes its mistake in marking these stocks as cheap.

Over the holiday weekend, I released the first video in a four-part series where I reveal my own methods for finding and investing in what I call “Rising Dividend” stocks. These are the perfect stocks for creating a wealth-building portfolio and income that will safely earn 10% and higher returns for you and help you build a nest egg that will last through retirement. Click the link below to watch this short educational video on how I find the market’s best dividend stock’s for building wealth.

Click here to watch my video on “The Perfect Dividend Stock”. 

 

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About Tim Plaehn

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments, and 30 Day Dividends, a specialty income service that takes advantage of opportunities for relatively fast, attractive profits around potential dividend payouts. Prior to his work with Investors Alley, Tim was a stock broker, a Certified Financial Planner, and F-16 Fighter pilot and instructor with the United States Air Force. During his time in the service he was stationed at various military locations in the U.S., Europe, and Asia. Tim graduated from the United States Air Force Academy with a degree in mathematics. Learn about Tim's new investment strategy for collecting income from the market each and every month without the use of options, futures, forex, covered calls, or risky trading strategies.