10 Undervalued Dividend Stocks to Watch

Dividend investing is a popular approach during times of high inflation and market turmoil, as it provides investors with a steady stream of income, regardless of the share price. Even though dividend-paying companies are common, many of these stocks are still considered undervalued – relative to their non-dividend-paying counterparts.

With that in mind, this guide takes a closer look at the best undervalued dividend stocks to invest in, according to financial experts. We’ll review ten stocks with above-average dividend yields before highlighting where investors can buy these stocks today – with low trading fees.

A Closer Look at the Best Undervalued Dividend Stocks to Invest In

More investors than ever are opting to buy dividend stocks due to the high level of inflation in the US and Europe. These stocks allow investors to generate a ‘yield’ in the form of regular dividend payments – even if the share price is decreasing.

Given the macroeconomic conditions, the undervalued dividend stocks detailed below are attracting attention from all corners of the market. Let’s take a closer look at these stocks, covering the information needed to make an informed investment decision.

1. Rio Tinto (RIO) – One of the Most Popular Undervalued Dividend Stocks in 2024

According to financial experts, one of the most undervalued dividend stocks right now is Rio Tinto. Rio Tinto is a giant metals and mining company established back in 1873. The company is headquartered in London and Melbourne, employing over 45,000 people globally.

The primary materials that Rio Tinto produces are copper, iron ore, bauxite, diamonds, uranium, and other assorted industrial materials. Iron ore is Rio Tinto’s main export, with the company owning locations in Australia, Canada, the US, and Europe.

As noted by Google Finance, Rio Tinto generated a whopping $63.50bn in revenue during 2021 – a 42.33% increase from the previous year. The company’s net profit margin stood at an impressive 51.69%, which has allowed Rio Tinto to provide an above-average yield of 9.11% at the time of writing.

From a share price perspective, RIO shares are down around 20% from May 2021’s highs. Much of this drop can be attributed to a decrease in the price of iron ore, which naturally affects Rio Tinto’s top line. However, once economic growth picks up, we should see increased demand for iron – which can only be good news for the RIO share price.

2. Philip Morris International (PM) – Global Tobacco Company with Above-Average Dividend

Philip Morris International is another of the most popular undervalued stocks that pays an above-average dividend. For those unaware, Philip Morris International is a globally-recognized tobacco company that operates in over 180 countries. The company owns several high-profile cigarette brands, including Marlboro, Merit, Benson & Hedges, and Chesterfield.

Tobacco companies often pay high dividends to shareholders to compensate for their controversial products. Many investors shy away from tobacco companies since tobacco is one of the leading causes of death globally. However, Philip Morris International currently pays a dividend yield of 5.18% – which will likely appeal to those unconcerned by the company’s image.

PM shares are still around 13% lower than February 2022’s highs, with many analysts stating they’re undervalued at current prices. Finally, Philip Morris International’s P/E ratio of 17.49 is below what it was in February 2022 and well below its value during the heights of January 2018 – hinting that shares may be trading at a discount.

3. Realty Income Corp (O) – US-Based REIT with Monthly Dividend Payments

Realty Income is a real estate investment trust (REIT) that invests in properties in the US, Spain, and the UK. Those looking to invest in REITs tend to gravitate towards Realty Income shares, as they are one of the few equities that pay a monthly dividend.

At the time of writing, O shareholders receive a dividend of $0.248 per month. This equates to an annual yield of 4.62%. Although this may not be as high as some other companies on our list, the ‘time value of money’ comes into the equation, making Realty Income shares highly regarded.

The O share price has been relatively volatile throughout 2022, mainly due to the Fed’s continued rate increases. When the benchmark interest rate rises, it makes mortgages more expensive – reducing the affordability of homes. Naturally, this impacts Realty Income’s business model.

After a 26% decline during August and September 2022, Realty Income shares appear to be back on track. Finally, Realty Income’s P/E ratio of 59.56 may seem high – but it’s still well below what it was throughout 2021 and early 2022.

4. Target (TGT) – Potentially Undervalued Retail Stock with Consistent Dividend

Target needs no introduction, as it is one of the largest retailers in the US and a constituent of the S&P 500. The company has over 1,900 locations throughout the US and proudly states that 75% of the country’s population lives within ten miles of a Target store.

Deemed by many retail traders as one of the best stocks to buy on Reddit, TGT shares have attracted a sort-of ‘meme stock’ status. This helped the share price increase by nearly 200% between March 2020 and November 2021- yet things worsened in 2022.

Since November 2021’s highs, the TGT share price has fallen by 39%. Fortunately, this is down to the harsh economic conditions rather than anything directly related to Target’s business model. Rising inflation and increased interest rates lead to decreased consumer spending – which naturally affects Target’s revenues.

However, once economic growth begins to pick up again, we should see consumers start ramping up spending. Despite all this turmoil, Target’s management has refused to cut the quarterly dividend payments – which stand at $1.08 per share. Given that the company has now paid a dividend for over 30 years, investors can benefit from the reliability of owning TGT shares.

5. Cisco Systems (CSCO) – Prominent Networking Company with Low P/E Ratio

Cisco Systems, commonly referred to as Cisco, is a US-based tech company that produces and sells networking hardware. Alongside hardware, Cisco also provides software for businesses, including domain security, videoconferencing tech, and ‘Internet of Things’ (IoT) connectivity.

Like most stocks, the CSCO share price has taken a massive hit in 2022 and is down by 23% YTD. Although the S&P 500 is only down by 16%, CSCO shares do pay a yield of 3.13%. This means that Cisco shares are performing slightly worse than the market this year – but still better than most growth stocks.

From a valuation perspective, Cisco trades at just 15.81 times this year’s earnings. Furthermore, Cisco recently released its fiscal Q1 2023 earnings report, which noted that quarterly revenue had increased by 6% YoY. Given the prevailing economic headwinds, many analysts viewed this positively – leading them to state that CSCO shares may be undervalued at current prices.

6. Best Buy (BBY) – Prominent Undervalued Dividend Stock with High Dividend Potential

Those looking to buy stocks with PayPal can invest in hundreds of dividend-paying stocks using the top online brokers – with Best Buy being one of the most popular. US-based investors will need no introduction to Best Buy, as it is a massive electronics retailer employing over 105,000 people.

Best Buy also has locations in Canada and generated over $51bn in revenue during 2021 – a 9.52% increase from the previous year. Like Target, Best Buy has also garnered attention from specific popular subreddits, making it a sort-of ‘meme stock’.

BBY shares are trading 42% lower than November 2021’s all-time highs – even though the company is still profitable every quarter. Net profit margins have been cut in half due to supply chain issues and rising expenses, yet Best Buy’s management has opted to continue paying a dividend.

This dividend yield stands at 4.32% at the time of writing – far higher than the S&P 500’s average yield of 1.82%. Finally, DividendMax notes that the company’s dividend cover is roughly 2.8, meaning Best Buy has the necessary resources to pay shareholders consistently.

7. Verizon Communications (VZ) – Colossal Telecoms Company with Attractive Payout Ratio

Verizon Communications, commonly referred to as Verizon, is a US-based telecommunications company. Verizon is currently the largest wireless provider in the States, with over 142 million subscribers as of Q2 2022.

Like many stocks, Verizon has been hit hard by the increases in the benchmark interest rate. Some Treasury bonds now offer a higher yield than VZ shares, which has undoubtedly affected investor sentiment. This can be seen in the Verizon price chart, with shares down over 25% YTD.

According to Dividend.com, Verizon’s current payout ratio is 51.51%. This is an appealing factor, as only around half of the company’s profits are used to pay dividends. As a result, Verizon still has plenty of cash to invest in high-growth areas and expand its operations.

Since the Fed cannot raise interest rates indefinitely, we’ll likely see VZ shares re-enter the limelight in 2023. Finally, with a forward P/E ratio of just 7.62, it’s clear why several financial experts believe that Verizon is currently an undervalued dividend stock.

8. Hargreaves Lansdown (HL) – Popular UK Dividend Stock with Rebound Potential

UK-based investors looking to invest $50k tend to partner with leading financial institutions like Hargreaves Lansdown. For those unaware, Hargreaves Lansdown is a British financial services company that forms part of the FTSE 100 index.

Hargreaves Lansdown allows clients to buy and sell shares and invest in funds and ISAs. Along with these investing services, HL clients can convert currencies and access financial advisory services.

HL shares pay a dividend yield of 4.72%, which is nearly 1% higher than the current FTSE 100 average dividend yield. Shareholders receive two dividend payments per year – although sometimes they receive a ‘Special’ dividend too.

Like many financial services stocks, the HL share price is down significantly in 2022. However, the company’s stellar brand reputation should provide the foundation for a rebound once the economy picks back up since retail investors will have more disposable income to invest, leading to increased revenues for HL.

9. Altria Group (MO) – International Tobacco Company Offering Annual Dividend Increases

Altria Group is one of the world’s largest tobacco producers and marketers. The company used to be part of Philip Morris, which we discussed earlier, yet was spun off and rebranded in 2003.

MO shares are some of the highest-paying shares in the S&P 500. At the time of writing, these shares pay a dividend of $0.94 per quarter. Based on today’s share price, this equates to a hefty yield of 8.1%.

Moreover, Altria Group continues to increase its dividend on an annual basis. The company even did this in 2020, at the height of the COVID-19 pandemic – meaning shareholders can be confident that their yield is safe.

This stock is constantly deemed undervalued due to the staying power of tobacco-based products. Although developing nations are beginning to veer towards vapes and other cigarette alternatives, many reports highlight that cigarette consumption is increasing in emerging countries. Due to Altria’s colossal presence, there’s scope for the company to benefit from this growing demand.

10. Devon Energy (DVN) – Potentially-Undervalued Energy Stock with a High Annual Yield

Concluding our discussion of undervalued dividend stocks is Devon Energy. This is one of the most popular renewable energy companies in the US – even though it is involved in oil and gas production.

Devon Energy is so highly-regarded because the company uses environmentally-friendly and ethical production processes. Furthermore, Devon Energy discloses its production results publicly and deploys measures to actively reduce methane emissions.

These factors have gone in the company’s favor, as the DVN share price is up 49% YTD. This far outpaces the S&P 500, and because it’s a smaller increase than the company’s rivals, there’s even an argument to be made that shares are still undervalued.

DVN shares also pay a healthy dividend yield of 7.58% – again, far higher than the S&P 500 average. Finally, several sources cite Devon Energy’s payout ratio as less than 50%, which is excellent news concerning dividend consistency.

What is an Undervalued Dividend Stock?

An undervalued dividend stock is precisely what the name suggests – a dividend-paying equity with a valuation less than its ‘intrinsic’ value. Most undervalued dividend stocks will be trading below their all-time highs, so they can be defined as undervalued relative to their former value. However, some of these stocks may be trading at a high price yet still considered discounted.

Those who buy stocks regularly will understand that the value seen in the market doesn’t necessarily reflect a stock’s ‘true’ value. But what is this ‘true’ value? There are several definitions, although most revolve around a stock’s future potential. This could be estimated through the present value of future cash flows or even subjective criteria set by individual investors.

Undervalued dividend stocks may also have lower values than companies within the same industry. However, it’s important to note that there’s no set definition for what an undervalued stock actually is. Thus, one investor may believe a specific stock is undervalued, whilst another may think it is overvalued.

How to Find Undervalued Dividend Stocks

The decision to invest in stocks requires extensive due diligence – and identifying undervalued dividend stocks is no different. With that in mind, detailed below are three popular approaches that investors can take to find these stocks:

Review Important Financial Metrics

A popular way to find undervalued dividend growth stocks is the review specific financial metrics. The most commonly used metric is the price-to-earnings (P/E) ratio, which measures a company’s share price relative to its profits. A higher P/E ratio may signify that a company’s share price is overvalued, whilst a low P/E ratio could highlight the latter.

However, the P/E ratio on its own doesn’t tell the whole story – it must be compared with other companies in the same industry or even compared to the firm’s historical P/E ratio. If the firm isn’t yet profitable, investors can use the price-to-sales (P/S) ratio, which measures the share price against the firm’s sales.

Compare with Other Stocks in the Same Industry

Following on from the previous point, investors can also find undervalued high-dividend stocks by looking at companies that operate in the same industry. Not only can investors compare their P/E ratios, but they can also compare other metrics, such as earnings-per-share (EPS), free cash flow (FCF), and revenue growth.

For example, if an investor wanted to buy 5G stocks, they could review the financials of several dividend-paying companies in the sector. If one company appeared to have solid financials, yet had a share price that was well below its rivals, then there could be a case to say the stock is undervalued. 

Seek Out High-Growth Sectors

Undervalued dividend growth stocks can also be identified by seeking out high-growth sectors. Since these sectors won’t have hit the ‘mainstream’, many companies may be flying under the radar. This means they may have low market caps and share prices.

Companies operating in high-growth sectors may have volatile share prices, which could make them unappealing to investors with low risk tolerance. However, this also means they exhibit enormous price potential – especially if the industry begins to expand rapidly. 

Why Do People Invest in Undervalued Dividend Stocks?

Those wondering what to invest in right now may wish to consider undervalued dividend stocks due to them being one of the market’s most popular types of equity. But why is this?

To answer this question, presented below are three reasons why investors are so keen on undervalued dividend stocks:

Source of Passive Income

A significant benefit of owning undervalued dividend stocks is that they provide a steady stream of passive income. Most companies make dividend payments quarterly, although some provide bi-annual or annual payments.

Investors can withdraw and use these disbursals in their everyday lives or reinvest them into the stock market. Investors can benefit from compound returns by taking the latter option, which can drastically increase capital gains.

Can Combine Capital Gains with Recurring Income

Many undervalued dividend stocks can also be considered recession-proof stocks – meaning they’re highly resilient during market stress. This makes these dividend stocks particularly appealing during today’s investing climate, as holders can benefit from capital gains and recurring income.

A popular approach is to dollar-cost average (DCA) into undervalued dividend stocks on a weekly or monthly basis. Even if prices are low, investors can lower their average purchasing price, providing scope for higher gains in the future.

Solid Hedge Against Inflation

Opting to invest during inflation can be daunting – yet it’s really the only way to maintain a semblance of purchasing power. Holding cash in the bank and earning a low amount of interest isn’t enough to outpace sky-high inflation.

However, undervalued high-dividend stocks are commonly used as a hedge against inflation. The yield they offer may not be as high as the inflation rate, but it can help investors hold on to the ‘value’ of their capital more effectively.

Potential Risks of Investing in Undervalued Dividend Stocks

Whether an investor wishes to invest $1,000 or $100,000, it’s crucial to understand the risks involved. Although undervalued dividend stocks may seem appealing, this doesn’t mean they’re foolproof.

Firstly, even though these stocks are undervalued, they can still go down in price. Being ‘undervalued’ is often subjective, meaning the broader market may not feel the same way. This is why combining subjective evaluations with objective metrics like P/E ratios and EPS data is essential.

Secondly, companies are well within their rights to reduce (or cut) dividends whenever they please. According to an article from CNBC, a total of $220bn of global dividend cuts occurred in 2020 alone. Since dividends are paid from a company’s profits, cuts are commonplace during times of economic turmoil.

Finally, it’s also worth pointing out the risk of inflation. The inflation rate is sky-high in economies around the globe, meaning that even though an investor may generate an income stream, they’ll likely still lose purchasing power. Avoiding this factor is challenging, so it’s essential to understand and plan accordingly. 

Undervalued Dividend Stocks to Watch – Conclusion

To conclude, this guide has taken a detailed look at ten potentially undervalued dividend stocks, covering why many analysts deem them undervalued and how investors can buy them with low trading fees.

Undervalued dividend stocks provide opportunities for capital gains and regular income, which will likely appeal to many investors. Although dividends (and yields) are never guaranteed, these stocks can be a great addition to an investment portfolio for those looking to generate passive cash flow. 

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