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As the stock market continues to hover around the flat-line mark in 2015, a number of stocks are looking cheap. While many companies are legitimately struggling these days, others are being punished simply because of the current market climate, despite ringing up higher sales and profits.
This can be very frustrating for investors, but the flip side of the coin is that the stock market’s malaise is creating great buying opportunities. As a company’s profits grow while its stock price stands still it becomes increasingly undervalued – and that creates an excellent opportunity for new investment.
Here are three undervalued large-cap stocks with very reliable payouts. (For a year-round smorgasbord of fat yields, click here.)
Apple (NASDAQ: AAPL)
Forward P/E: 11
Dividend Yield: 1.8%
The first candidate is Apple, the biggest company in the world by market capitalization. Apple’s stock is a perplexing case, because the company simply dominates its industry and is registering amazing growth. And yet the stock is down about 15% from its recent 52-week high.
All Apple did last quarter was grow revenue 32% year-over-year, to $49.6 billion. The iPhone continues to be the primary growth driver for Apple. It sold 35% more iPhones last quarter than in the same quarter last year, and the average selling price for iPhones grew $99 to $660, a 17% year-over-year increase.
Apple isn’t the highest dividend yield around, but it more than makes up for it with high dividend growth. It increased its dividend by 10% last year, and 7% the year before. Going forward, it’s entirely reasonable to expect a double-digit growth rate for Apple’s dividend – perfect for building massive long-term wealth.
Chevron (NYSE: CVX)
Forward P/E: 15
Dividend Yield: 5%
It’s hardly a secret that the huge collapse in commodity prices over the past year has sunk Chevron’s stock, which is down 25% year-to-date. But this has opened up a once-in-a-decade dividend opportunity.
Chevron’s dividend yield now exceeds 5%, which is extremely rare for this stock. Its dividend yield hasn’t been above 5% at any point in the last decade – not even during the Great Recession of 2008-2009. This might stoke fears that the dividend is not secure. After all, Chevron’s earnings fell 90% last quarter, year-over-year.
But Chevron is taking the necessary steps to protect its dividend. The company suspended stock buybacks this year, which freed up $5 billion. In addition, it’s aggressively selling assets deemed non-critical to the future. Chevron realized approximately $4 billion in divestments over the first four months of this year, and it’s on track to raise as much as $15 billion over its stated 48-month divestment program.
Thanks to these actions, Chevron expects the dividend to be fully covered by free cash flow by 2017. It should be able to at least maintain its dividend until then.
Verizon Communications (NYSE: VZ)
Forward P/E: 11
Dividend Yield: 4.7%
Last but not least, Verizon is one of the highest-yielding stocks in the Dow Jones Industrial Average. As a telecommunications giant, Verizon can afford such a generous payout because it produces a great deal of free cash flow.
Verizon generated $10.7 billion of free cash flow just in the first half of 2015, from which the company returned $4.2 billion to investors in dividend payments. As a result, investors do not need to worry about the sustainability of Verizon’s distribution, since its free cash flow payout ratio is a very healthy 39%.
In fact, it has now been four full quarters since Verizon last increased its dividend, so investors can actually expect a dividend raise over the coming weeks.
Bottom Line
The stock market is once again turning lower, due to a variety of global economic and geopolitical concerns. But the biggest, strongest companies continue to churn out higher profits, and many of them share their profits with investors.
Apple, Chevron and Verizon are each cheaper than the broader market, with strong dividend yields that will pay investors well as they wait for higher stock prices.
DISCLOSURE: Bob Ciura personally owns shares of Apple (NASDAQ: AAPL).