Income investors love the combination of income and growth that dividend stocks offer. The only thing better than a dividend stock with a healthy yield is a stock that combines strong dividends with attractive valuations.
Sometimes, investors beat down a dividend stock so far that it just gets embarrassingly cheap. Below, I’ll take a closer look at Bank of Nova Scotia (NYSE:BNS), Valero Energy (NYSE:VLO), and Ford Motor (NYSE:F) — all of which have attractive dividend yields, low valuations, and the potential to restore shareholders’ faith in their long-term business prospects.
Look north
U.S. investors often neglect Canadian banks, but the biggest financial players north of the border have a lot to offer. Bank of Nova Scotia (also known as Scotiabank) has a reputation for excellence, and with its current yield coming in at around 4.5%, dividends have played a key role in keeping Scotiabank’s shareholders happy.
Yet Scotiabank has faced some challenges lately, with its stock down 11% over the past year. Domestic banking performance has largely been to blame, as the bank has missed earnings expectations for three straight quarters despite seeing solid growth in its international banking operations. Rising expenses and higher loan losses have become somewhat problematic, and Scotiabank is seeing pressures that many of its Canadian peers aren’t seeing — a troubling sign for the bank.
Nevertheless, Scotiabank has confidence in its future, and it’s expressed that confidence through higher payouts. The bank made a 2.4% increase to its dividend in February, and despite a cooling housing market in Canada and the challenges of integrating large acquisitions to its wealth management division, Scotiabank appears primed to take advantage of recovering stock markets and concentrate on its best international opportunities. At an earnings multiple of just 11, moreover, Scotiabank’s shares aren’t out of line with what you’d pay for high-quality banks across North America.
Energetic dividends
Valero Energy also has a healthy dividend yield of 4.2%, but like Scotiabank, the refining giant’s stock has been under pressure over the past year. Shares are down 9% since this time last year, with much of the decline coming in the last quarter of 2018. That’s brought earnings multiples down considerably, into the 11 to 12 range recently.
The thing to remember about Valero is that its exposure to energy is in some ways the reverse of what most companies in the space experience. Valero likes low oil prices as long as it can sell refined products like gasoline and diesel fuel at relatively healthy prices, because crude oil is the refinery company’s input rather than output. Yet the steep plunge in markets for refined products outpaced oil’s drop in late 2018, and that sent the stock tumbling.
Even so, the refiner has continued to produce good results. In its most recent quarter, Valero saw operating income jump more than 50%, with strong gains in its refinery operations offsetting weakness in its ethanol business. Efforts to provide infrastructure to move cheap domestic crude to its refinery locations have paid off handsomely, and high utilization rates indicate that Valero’s taking maximum advantage of current conditions. Refining is cyclical, but a high dividend and good prospects make Valero look like a bargain.
Ford revs its engines
Finally, Ford Motor has been high on the list of dividend payers for a long time. With a regular quarterly dividend of $0.15 per share, the automaker’s yield has climbed to nearly 7% — yet the stock currently fetches just 10 times trailing earnings and less than seven times what Wall Street expects Ford to earn in 2019.
The main problem for Ford is that its business has hit hard times. In 2018, operating profit for the automaker was down 28%, and revenue managed only a 2% gain. Ford shipped almost 10% fewer vehicles in 2018 than it did in 2017, and conditions were especially weak internationally, as the automaker suffered substantial losses in South America, Europe, and China. Efforts to innovate in areas like autonomous vehicles haven’t yet paid dividends, and pension charges also weighed on profits.
But Ford has prospects to bounce back. The company thinks that higher steel prices, a strong dollar, and other headwinds are likely to ease up in 2019, and that should help its international results. Investors have been waiting for a turnaround to take shape, but the odds look better that Ford will make it a reality in the near future.
Put the odds in your favor
Cheap dividend stocks aren’t surefire winners, as there are always things that can happen to hurt a business further. Yet given their potential for success, Ford, Valero, and Scotiabank all look embarrassingly cheap right now — and you can get paid a handsome dividend even as you wait to see share prices go back up.
