These dividend stocks are overachievers.
Dividends are a relatively safe way for investors to get reliable returns, but dividend stocks often struggle to keep pace with the returns of the overall market. Fortunately for dividend investors, a decent dividend yield doesn’t necessarily mean investors should give up on share price gains as well. Bank of America’s yield advantage model screens for dividend stocks that are also undervalued based on factors such as free cash flow, enterprise value and return on capital. Here are eight dividend stocks positioned to outperform their peers.
H&R Block (ticker: HRB)
H&R Block has the highest yield advantage score of any stock. H&R Block’s cash flow-to-enterprise value ratio (13 percent) and its return on capital (37.8 percent) are among the top percentile of stocks screened. HRB stock has lagged the market in 2018, but that simply means that dividend investors get a higher yield if they buy the dip. The stock’s forward earnings multiple of 12.3 suggests downside is limited. H&R Block raised its dividend payout by 4.2 percent in June, and its current yield is 3.9 percent.
HP is tied with H&R Block in overall yield advantage score, but its 161.6 percent return of capital is tops among all stocks screened. HP also has an impressive 11 percent free cash flow-to-enterprise value ratio, and its recently approved $4 billion buyback plan should help support the stock in the near term. HP’s legacy printer and PC markets may be in decline, but HP has been gaining share from competitors who have succumbed to the difficult environment. HP has a 2.1 percent dividend yield. Bank of America has a “buy” rating and $28 price target for HPQ stock.
Now that all the Broadcom merger drama has died down, the company is recommitting to capital returns. Broadcom’s FCF/EV of 14 percent is higher than any other stock screened, and its return of capital is also a respectable 25.7 percent. Broadcom has a 2.8 percent dividend yield, but the company has pledged to pay out 50 percent of its free cash flow in dividends. That rate suggests Broadcom’s dividend could jump to as high as 3.8 percent in November. Bank of America has a “buy” rating and $300 price target for AVGO stock.
Altria Group (MO)
Tobacco giant Altria Group will likely continue to face regulatory pressures, but its modest forward earnings multiple of 14 and its impressive return of capital of 39.2 percent suggest the stock is a bargain at its current level. In addition, Altria’s free cash flow is on track to increase by 48 percent in 2018, contributing to an impressive 9 percent FCF/EV ratio. With a dividend yield of 5.2 percent, Altria is the highest-yielding stock at the top of the yield advantage screen. Bank of America has a “buy” rating and $70 price target for MO stock.
LyondellBasell Industries is a petrochemical company with a focus on North American olefins and polyolefins. LyondellBasell’s margins benefit from low natural gas prices and high crude oil prices. The company has a 10 percent FCF/EV and a 32.1 percent ROC. However, rising polyethylene prices have led to an increase in industry capacity that could weigh on earnings and margins in the years ahead. LyondellBasell has been steadily increasing its dividend since 2011, and its current yield is up to 3.8 percent. Bank of America has on “underperform” rating and $100 price target for LYB stock.
Pfizer is one of the largest pharmaceutical companies in the world, and the stock has a FCF/EV of 10 percent and a return of capital of 22 percent. Pfizer’s biggest near-term threat is patent expiration of Lyrica in December. However, Pfizer’s FCF is on track to increase by roughly 50 percent in 2018, and its forward earnings multiple of 14.1 indicates its capital return program is well-funded and its stock has downside protection. Pfizer’s dividend yield is 3.1 percent. Bank of America has a “buy” rating and $46 price target for PFE stock.
Verizon Communications (VZ)
Not only is Verizon one of the highest-yielding stocks in the yield advantage screen, its 4.6 percent dividend is the highest yield among the 30 Dow Jones industrial average components. With a FCF/EV of 9 percent, a ROC of 20.6 percent and a forward earnings multiple of 11.2, VZ stock offers investors much more than just its dividend. After major investments, Verizon launched the nation’s first commercial 5G wireless commercial broadband service in Sacramento earlier this month. Bank of America has a “buy” rating and $58 price target for VZ stock.
Las Vegas Sands Corp. (LVS)
The U.S. trade war with China has spooked Macau casino investors, and Las Vegas Sands stock has taken a 24 percent hit in the past three months. The sell-off has pushed Las Vegas Sands’ dividend yield up to 4.9 percent. While investors wait for an end to the trade war, a 7 percent FCF/EV, a 21.8 ROC and a recently-announced $2.5 billion share buyback program will help support the stock. Bank of America has a “neutral” rating and $80 price target for LVS stock.
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