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Philip van Doorn

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Oct. 9, 2016, 12:51 p.m. EDT

29 undervalued dividend stocks in all U.S. sectors

Each company has a dividend yield of at least 3% and the ability to increase payouts

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By Philip van Doorn, MarketWatch


Bill Pugliano/Getty Images
Ford has a dividend yield of almost 5% and trades for only 6.8 times 2017 earnings, half that of its sector average.

With dividend stocks hot this year, some market experts are advising investors to be cautious and selective. Identifying companies with room to raise dividends significantly, rather than focusing on finding the highest yields, might be your best way forward.

That theme was explored by MarketWatch writer Jeff Reeves and Bob Phillips, managing principal of Spectrum Management Group. Interestingly, there was some overlap between their stock recommendations.

Phillips said the most important factor when considering a dividend stock is the likelihood of big dividend increases over time. Rising dividends are much more likely if a company’s free cash flow (remaining cash flow after capital expenditures) leaves plenty of so-called headroom for higher dividend payouts. He said it’s important not to overpay for a stock, which may be a tall order considering that we’re seven years into a bull market and that this year’s market gains have been driven by dividend stocks.

So we decided to take a deep dive into the S&P 1500 Composite Index — which includes the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.48% , the S&P 400 Mid-Cap Index /zigman2/quotes/210599897/delayed MID -0.52%  and the S&P Small-Cap 600 Index — to identify possible dividend-stock bargains in every sector.

For each of the 11 sectors, we have listed up to three companies with forward price-to-earnings ratios (based on consensus 2017 earnings estimates) that are lower than the aggregate. Those companies also have dividend yields of at least 3%, with headroom to raise dividends, based on free cash flow yields, and are expected by analysts to increase their sales by at least 1% in 2017.

We have calculated free cash flow yields by dividing free cash flow per share for the past 12 months by the closing share price on Sept. 30.

Any screening approach has its flaws. For example, a company trading at a low price-to-earnings ratio relative to peers could have some major problems. Or not. Also, a company excluded from the list, because it is not expected to increase earnings next year, may be in that position simply because it sold or spun off a business unit.

But the screen can provide a starting point for your own research. You will need to do some work on your own to understand a company’s business and form an opinion about its likelihood of success within its industry over the coming years or decades.

Here are all 29 stocks that passed the screen, broken down by sector:

Consumer discretionary

Company Ticker Dividend yield Free cash flow yield - past 12 months ‘Headroom’ Estimated 2017 sales growth Price/ consensus 2017 EPS estimate
Ford Motor Co. /zigman2/quotes/208911460/composite F 4.97% 28.01% 23.04% 1% 6.8
Buckle Inc. /zigman2/quotes/207388380/composite BKE 4.16% 12.29% 8.13% 1% 10.2
Kohl’s Corp. /zigman2/quotes/210414114/composite KSS 4.57% 16.59% 12.02% 1% 10.6
Source: FactSet, market close on Sept. 30, 2016

In comparison, the S&P 1500 consumer discretionary sector trades for 17.1 times weighted consensus 2017 earnings estimates.

Consumer staples

Company Ticker Dividend yield Free cash flow yield - past 12 months ‘Headroom’ Estimated 2017 sales growth Price/ consensus 2017 EPS estimate
Flowers Foods Inc. /zigman2/quotes/201762788/composite FLO 4.23% 6.65% 2.42% 1% 15.8
General Mills Inc. /zigman2/quotes/206659526/composite GIS 3.01% 4.48% 1.47% 1% 18.7
Source: FactSet, market close on Sept. 30, 2016

The consumer staples sector trades for 19.4 times weighted consensus 2017 EPS estimates.

Energy

Company Ticker Dividend yield Free cash flow yield - past 12 months ‘Headroom’ Estimated 2017 sales growth Price/ consensus 2017 EPS estimate
Valero Energy Corp. /zigman2/quotes/200735463/composite VLO 4.53% 13.68% 9.15% 20% 10.4
Marathon Petroleum Corp. /zigman2/quotes/209634297/composite MPC 3.55% 8.36% 4.81% 15% 11.8
Western Refining Inc. 5.74% 13.83% 8.09% 21% 15.4
Source: FactSet, market close on Sept. 30, 2016

The energy sector trades for 34.6 times weighted consensus 2017 EPS estimates.

/zigman2/quotes/210599714/realtime
US : S&P US
3,044.31
+14.58 +0.48%
Volume: 4.38B
May 29, 2020 5:14p
loading...
/zigman2/quotes/210599897/delayed
US : S&P US
1,763.95
-9.17 -0.52%
Volume: 829.77M
May 29, 2020 5:14p
loading...
/zigman2/quotes/208911460/composite
US : U.S.: NYSE
$ 5.71
-0.14 -2.39%
Volume: 93.04M
May 29, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
0.00%
Market Cap
$22.71 billion
Rev. per Employee
$805,719
loading...
/zigman2/quotes/207388380/composite
US : U.S.: NYSE
$ 14.08
-0.64 -4.35%
Volume: 1.23M
May 29, 2020 4:00p
P/E Ratio
8.88
Dividend Yield
0.00%
Market Cap
$695.67 million
Rev. per Employee
$119,662
loading...
/zigman2/quotes/210414114/composite
US : U.S.: NYSE
$ 19.22
-0.90 -4.47%
Volume: 21.26M
May 29, 2020 4:00p
P/E Ratio
37.91
Dividend Yield
0.00%
Market Cap
$2.98 billion
Rev. per Employee
$156,814
loading...
/zigman2/quotes/201762788/composite
US : U.S.: NYSE
$ 23.59
+0.18 +0.77%
Volume: 1.06M
May 29, 2020 4:00p
P/E Ratio
53.83
Dividend Yield
3.39%
Market Cap
$4.99 billion
Rev. per Employee
$429,549
loading...
/zigman2/quotes/206659526/composite
US : U.S.: NYSE
$ 63.04
+1.13 +1.83%
Volume: 5.43M
May 29, 2020 4:00p
P/E Ratio
18.13
Dividend Yield
3.11%
Market Cap
$38.21 billion
Rev. per Employee
$414,842
loading...
/zigman2/quotes/200735463/composite
US : U.S.: NYSE
$ 66.64
-0.49 -0.73%
Volume: 4.97M
May 29, 2020 4:00p
P/E Ratio
68.10
Dividend Yield
5.88%
Market Cap
$27.17 billion
Rev. per Employee
$11.41M
loading...
/zigman2/quotes/209634297/composite
US : U.S.: NYSE
$ 35.14
-0.04 -0.11%
Volume: 11.45M
May 29, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
6.60%
Market Cap
$22.85 billion
Rev. per Employee
$1.59M
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