Undervalued Dividend Stocks!

Should We Buy If This Signal Shows Undervaluation?

What Does Undervaluation Mean?

Undervalued means something different to every investor, what could be undervalued to you may not necessarily be undervalued to your neighbor or friend.

So let’s talk basics, at the base level an undervalued stock is when it is selling at a price that is significantly below what is assumed to be its intrinsic value.

One example being, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows (any other forms of valuation methods), then it is an undervalued stock.

It could also mean a stock that is trading with a significant margin of safety.

Dividend Yield Theory

Today we are going to look at undervalued stocks based on dividend yield theory.

This theory states that a company is undervalued when the current yield is sitting above the historical yield (we can use the 5-year average).

Example 1:

XYZ Company Yield is 3.12% today.

XYZ Company Yield on average over the last 5 years was 2.7%.

Therefore, we would say that today based on dividend yield theory, Company XYZ is undervalued.

Example 2:

Hamburger Company Yield is 3.69% today.

Hamburger Company Yield on average over the last 5 years was 4.5%.

Therefore, we would say that today based on dividend yield theory, Hamburger Company is overvalued.

The same can be said for the forward P/E, however the opposite would be true.

Example 3:

New England Company forward P/E is 14.3 today.

New England Company forward P/E was 16.4 on average over the last 5 years.

Therefore, we would say that today, New England Company is undervalued.

Example 4:

Pears Company forward P/E is 15 today.

Pears Company forward P/E was 9.5 on average over the last 5 years.

Therefore, we would say that today, Pears Company is overvalued.

Double Sign Of Undervaluation!

We would say we have a double sign of undervaluation when a Company is both trading at a higher yield than on average over the last 5 years, and the forward P/E is lower than that of the 5-year average.

Example below:

10 Stocks With A Double Undervaluation Signal

So which stocks meet these criteria?

Let’s take a look below:

Stock 1 - Altria Group (MO)

Stock 2 - Verizon (VZ)

Stock 3 - Realty Income (O)

Stock 4 - VICI Properties (VICI)

Stock 5 - Bristol-Myers Squibb (BMY)

Stock 6 - PepsiCo (PEP)

Stock 7 - Johnson & Johnson (JNJ)

Stock 8 - Kimberly-Clark (KMB)

Stock 9 - Public Storage (PSA)

Stock 10 - British American Tobacco (BTI)

Latest YouTube Video

In our latest video we have ran through in more detail, 4 undervalued dividend stocks that are below $100.

If you are interested in valuing stocks yourself, we have created a valuation model below which you can pick up:

Conclusion

Whilst we have ran through dividend yield theory and selected a number of stocks that meet these criteria, you should always do your own due diligence but this could be used as a starting point for identifying stocks that could be undervalued.

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Note: I am not a financial advisor or licensed professional. Nothing I say or produce anywhere, should be considered as advice. All content is for educational purposes only. I am not responsible for any financial losses or gains. Invest and trade at your own risk.