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After the market’s recent beating, bargain stocks are everywhere. With another 500-point drop on the Dow Jones Industrial Average on Tuesday, investors are in full-blown panic mode over slowing economic growth in China.
But for long-term investors, this sell-off is just creating excellent long-term buying opportunities. Many companies are still expected to grow earnings in the year ahead. Thanks to their stock declines, they are now undervalued based on their forward earnings expectations.
Here are three top dividend stocks in the Dow 30 that investors should consider buying after the huge declines in recent weeks.
A World-Class Health Care Stock
The first cheap dividend stock is health care giant Johnson & Johnson (NYSE: JNJ). J&J stock trades for 14 times forward earnings per share estimates. These are both significant discounts to the stock market averages.
J&J is a true conglomerate. J&J operates the largest medical devices business in the world, the sixth-largest biologics company, the sixth-largest consumer health company, and the fifth-largest pharmaceuticals company. And J&J holds a dominant industry position across its product categories. It collects 70% of its revenues from either No. 1 or No. 2 global leadership positions in their respective markets.
Excluding foreign exchange, J&J grew earnings by 6% last quarter. That kind of steady growth is exactly what fuels J&J’s impressive dividend growth.
Thanks to its world-class businesses, J&J is a legendary dividend growth stock. The company has increased its dividend for 53 consecutive years, which makes it a Dividend Aristocrat more than twice over. This streak includes a nice 7% dividend increase earlier this year. The stock offers a very attractive 3.2% dividend yield.
Top Dow Dividend Stocks: Tech & Telecom
Here are two more top Dow dividend stocks. These cheap stocks come from the technology and telecommunications industries. The names: Verizon Communications (NYSE: VZ) and Intel (NASDAQ: INTC).
Verizon and Intel trade for 11 and 12 times forward EPS expectations, respectively. And, they offer very strong dividends. Verizon yields 4.8%, while Intel currently yields 3.4%.
The strongest technology and telecom companies enjoy high free cash flow, which is why they can easily afford to pay such robust dividend yields. Intel generated $4 billion of free cash flow over the first half of the year, and paid $2.2 billion of dividends in that time. That equates to a very comfortable 55% free cash flow payout ratio.
Likewise, Verizon is a cash flow machine. Through the first half of 2015, Verizon generated $10.7 billion of free cash flow. Free cash flow increased 69% from the same six-month period last year. Verizon’s growth is impressive, and it’s due primarily to its wireless business. Verizon Wireless grew revenue 5.3% last quarter, year over year.
Verizon’s free cash flow payout ratio is a very healthy 39%. Verizon’s high free cash flow will easily allow for continued dividend growth each year.
The Bottom Line
It’s easy to get scared out of the market when stocks are falling. On days like Sept. 1, when the Dow fell 500 points, the temptation is to cut and run from stocks, in fear of further losses.
But days like that are often the best time to buy. The market’s irrationality is setting up very nice buying opportunities for patient investors. These three Dow stocks are offering very attractive valuation and high dividend yields thanks to the market mayhem.
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