3 Easy Ways To Find Cheap Dividend Stocks
Imagine this: You're out shopping for a T-shirt and you stumble upon the perfect one, but the price tag makes you cringe, so you decide it's not worth the money and walk away.
A few weeks later, you return to the same store, and to your amazement, that very same T-shirt is on the clearance rack for 40% off. Score!
Even though it's the same T-shirt, you can now justify the purchase because of the incredible value you're getting at the clearance price, and dividend stocks work in a similar way.
When you buy an undervalued stock, not only are you stretching your investment dollars further compared to buying at a higher price, but you're also able to lock in a higher dividend yield (share price goes down = dividend yield goes up) and establish a greater margin of safety.
The margin of safety is especially important, and serves as a cushion to help protect your investments against potential losses since much of the downside is (hopefully) already factored into the share price.
Now, that all sounds great, but it begs the question: how do you identify these undervalued dividend stocks?
There are three easy ways to do so, beginning with the share price.
Seeking Alpha | Realty Income (O) share price performance
Keep an eye out for stocks whose share prices have been declining, which is what's been happening to Realty Income (O) pictured above.
This can indicate a potential discount, and is the most straightforward comparison to our T-shirt example from earlier.
Also, look for stocks trading at their 52-week lows. This is a clear sign of discounted trading compared to the stock's performance over the last year.
Seeking Alpha | Pfizer (PFE) valuation metrics
Another way you can identify potentially undervalued stocks is by looking at the Price-to-Earnings Ratio (AKA the P/E Ratio), which compares a stock's current share price to its earnings per share.
This tells you how much you're paying for each dollar of earnings the company generates, and you can compare P/E ratios between different companies or against a company's historical average.
For example, Pfizer's (PFE) P/E ratio of 9.97 is very low in its own right, but this is also 13.6% lower than the company's five year average P/E ratio, which suggests that the stock may be priced at a discount right now compared to its historical relative valuation.
Seeking Alpha | Pfizer (PFE) dividend yield metrics
The third way to spot a potentially undervalued stock is simply by looking at the dividend yield.
You'll remember that as a company's share price goes down, the dividend yield goes up, so be on the look out for instances where a stock's current dividend yield surpasses its historical average yield.
This is the case for Pfizer (PFE) whose yield is currently 33% higher than the company's five year average. Unbelievable!
Having said all of this, while these methods can reveal potentially discounted opportunities, it's essential to understand why a stock is undervalued before you decide to swoop up any shares.
A cheap valuation may exist for good reason, and it's your job as an investor to determine if the discount is due to something detrimental, or if the market's sentiment toward the stock is overblown, which I think is the case for the four discounted stocks in this video here.
With that, I want to hear from you. Which stocks do you think are undervalued right now? Write to me here and let me know.
And a big thank you to the 12 readers who responded last week. You rock! 🙌
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ICYMI
In this video, we're going to go through all 10 of the dividend payments I received this month, and I'll also show you how much I'm anticipated to make coming up in October.
Looking for the best discounted dividend stocks to buy in October? In this video, I'm talking about 4 of them, all of which are currently priced at a bargain and can serve as excellent additions to your portfolio.
W.P. Carey (WPC) recently announced that they'll be selling more than half of their office properties and putting the others into a new company to be spun off as a separate publicly traded REIT. In this recent Dividend Happy Hour, we dive a bit deeper into the news, and I share with you my thoughts on the matter as well as what I'm doing with WPC from here.
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"Hi mate. I feel I've added too much O as it's dropped and now have it at 10% of my portfolio. Shall I stop adding to it even though it's dropping?"
- @smeg3519 | YouTube
If you believe in the long-term growth prospects of the company, then I don't necessarily think it's a bad thing to hold a significant position in it.
However, it's also important to understand your overall portfolio goals and risk tolerance. If having a 10% allocation to any individual position is unsettling, then it may be worth it to consider rebalancing your portfolio, which could involve selling some of your O shares and reallocating the funds to other stocks in order to achieve a better balance.
Interestingly enough, I was in this same exact position with Realty Income a few years ago when I first started investing. I had bought so many shares that, at one point, it was like 12-13% of my overall portfolio, which admittedly was too high for my liking.
Instead of selling some of those shares and rebalancing my portfolio, I just ceased any additional contributions to the company and decided to invest elsewhere. The rebalancing naturally occurred over time, and now Realty Income is only about 5.5% of my overall portfolio.
In hindsight, I'm really happy that I took that approach instead of selling any shares, and if you think Realty Income will be a good long-term hold, then this same approach may be one to consider.
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