5 Strong Dividend Stocks With Reasonable Valuations (2024)

With the exception of a few growth investments, I am a value investor at the core. But in recent years finding dividend paying stocks at reasonable valuations has become more difficult.

While this list cannot contain all dividend value stocks, it contains most of my favorites that I believe carry a good combination of value, yield, and upside.

Laurentian Bank of Canada (OTCPK:LRCDF)

For investors looking to diversify outside of U.S. financial institutions, Laurentian Bank offers an interesting dividend value play.

The Quebec-based bank is smaller than the major Canadian banks, carries a market capitalization of US$1.1 billion, and has been around since 1846.

But while most Canadian banks trade at around twice their book value, Laurentian Bank trades at roughly one times its book value. Despite the discount, Laurentian Bank is highly profitable and trades at 9.0 times est. 2015 earnings and 8.3 times est. 2016 earnings; again a discount to most other Canadian banks trading above 10 times forward earnings.

The bank also pays a dividend higher than any of the four major U.S. banks coming in at 4.3%. And compared to the U.S. banks, it held up much better for shareholders during the financial crisis. While U.S. banks slashed dividends, Laurentian Bank raised its dividend which is currently 69% higher than it was at the end of 2007.

Risks: Laurentian Bank is tied to the Canadian economy and, more specifically, to the Quebec economy. The drop in oil prices could put pressure on the Canadian economy creating less optimal conditions for banks.

Additionally, there is some discussion over a potential housing bubble in Canada. Ultimately time will tell if these predictions as true but a collapse in Canadian residential real estate values could impair loans held by all Canadian banks.

Delta Air Lines (DAL)

At first, an airline seems like the last place a dividend investor would want to go but Delta has made major strides in the last few years to make the list.

Having $17 billion in adjusted net debt back in 2009, management has slashed the burden to $7.4 billion today and expects to push this down to $4 billion by 2017. The move has pushed Delta's credit rating higher, cut interest expense by over $500 million annually, and made the airline less leveraged.

Delta has also been a leader among major U.S. airlines in returning capital to shareholders. It was the first of the U.S. legacy carriers to reinstate its dividend and has since raised it by 50% two years in a row. The dividend now yields 1.2% but has the potential for further increases given the lower fuel price environment and strong profits in the industry.

Alongside the dividend, Delta is also rewarding its shareholders with a $5 billion share buyback intended to be completed by 2017. With shares trading at only 9.3 times est. 2015 earnings and 8.4 times est. 2016 earnings, the buyback should be accretive to earnings given the stock's wide discount to the S&P 500 average of 18 times forward earnings.

For a series of factors, I prefer share buybacks over dividends at airlines. Nonetheless, the value and dividend growth potential make Delta Air Lines one of my top dividend value picks.

Risks: Airlines have a history of being boom-and-bust stocks. While I believe greater levels of capacity discipline and massive consolidation have mitigated much of the risk, airlines, Delta included, still carry cyclical risks due to travel demand.

In addition, fuel prices can have a big effect on airline profits. The recent drop in fuel prices has been a boost to the industry but rebounding fuel prices could take back the savings just as quick. Like most airlines, Delta employs fuel hedging techniques but these only go so far and increasing fuel prices can still eat into earnings.

Ford Motor Company (F)

The only one of the Detroit Three not to fall under government ownership during the financial crisis is definitely worth a look for dividend value investors today.

The maker of the top selling pickup (the Ford F-150) stands in an excellent position to benefit from lower fuel prices. But even with its pickup selling like hotcakes, Ford has taken action to update its product line. Among the updated models recently released was a lighter aluminum F-150, a redesigned Mustang, a revamped Edge, and an ST version of the Focus. For 2015, Ford plans to launch a total of 15 new vehicles worldwide.

However, this has not resulted in an excess of platforms. In fact, Ford is reducing the number of platforms it uses to cut costs. Back in 2007, Ford had 3.9 vehicles per platform but this has since been increased to 5.7 vehicles per platform with a goal to hit 6.6 vehicles per platform by 2019.

At 9.7 times est. 2015 earnings and 8.2 times est. 2016 earnings, Ford shares trade at a wide discount to the market average. While I don't expect Ford shares to achieve the 18 times forward earnings valuation due to a market discount historically applied to capital intensive industrials, the current valuation shows shares to be reasonably valued with the potential for significant earnings growth.

Since the financial crisis, Ford has reinstated its dividend and boosted it to $0.15 per quarter. This results in a 3.8% yield for a reasonably valued stock with strong earnings growth potential.

Risks: Automotive profits tend to be cyclical so economic downturns could negatively impact profits at Ford. While the reviews have been generally positive so far, Ford is also pioneering the use of aluminum in a mass market pickup truck.

Overall, I am bullish on the aluminum truck but it does pose a potential financial risk if it encounters problems that require recalls from the automaker.

COPEL (ELP)

Over the past few years, shares of utilities have taken on high valuations but COPEL, formally known as Companhia Paranaense de Energia, trades at a low valuation compared to U.S. based utilities.

COPEL is an electric utility in Brazil controlled by the state of Parana; an area where it provides electricity to virtually all homes and businesses. In total, the company has 21 power generation stations with all but two being hydroelectric stations and the utility proudly states that 90% of its energy comes from renewable sources.

Unlike most U.S. companies where the dividend is paid quarterly and fairly consistent, COPEL's dividend is semi-annual and varies by payment. Taking the last two dividend payments, which is preferable over annualizing the last payment since the November payment is the larger one, COPEL yields around 7.8%. However, this is not a fixed dividend.

Currently trading at 9.7 times est. 2015 earnings and 6.7 times est. 2016 earnings, COPEL gets a wide discount to U.S. utilities. This discount is mainly due to two key factors. The first being the volatility of dividends and their connection to the Brazilian real. The second is the majority ownership by Parana which creates an overhang that investors prefer to avoid.

But for those willing to handle a dividend that is more volatile than normal, COPEL lets you collect a larger dividend than U.S. utilities while acquiring shares at a lower valuation.

Risks: An economic slump in Parana could negatively affect the ability for customers to pay their electricity bills. Unlike most utilities where the utility could cut off power, COPEL may be forced to continue providing power due to the control of the Parana state government. In a worst case scenario, this could result in a situation similar to that of Public Power Corporation of Greece (OTC:PUPOF).

Dividends and the shares themselves are also subject to changes in the value of the Brazilian real. In late 2014 and early 2015, the Brazilian real dropped from $0.45 USD to the low $0.30 USD range lowering the value of dividends in USD terms. Since then the currency has stabilized and even recovered slightly but a further drop in the real could result in lower dividends and share prices.

Fly Leasing LTD (FLY)

With the rebound in airline industry fortunes, commercial aircraft leasing companies have boomed. For these companies, the basic business model involves raising funds to purchase aircraft and leasing them to airlines.

Today, Fly Leasing owns 127 aircraft on lease to 65 airlines in 32 countries with the vast majority of these aircraft being narrowbodies. The company is also externally managed by BBAM; a management system that contrasts with the more traditional structures at AerCap (AER), AirCastle (AYR), and Air Lease (AL).

Back in early 2009, Fly Leasing cut its dividend from $2.00 annually to $0.80 annually but raised it to $1.00 annually in early 2014. Today, this gives Fly Leasing a 6.6% dividend yield well above those of its plane leasing rivals. However, this has more to do with corporate strategy since Fly Leasing pays out about 75% of its earnings while its rivals mainly reinvest in the business.

Trading at 11 times est. 2015 earnings and 9 times est. 2016 earnings, Fly Leasing is fairly valued compared to peers while trading at a large discount to the market average. However, unless the entire industry increases in valuation I expect Fly Leasing's valuation to follow that of the industry.

As I've mentioned in previous articles, I am bullish on the airline industry and I believe aircraft leasing companies are a good alternative for those who want to avoid airlines themselves. If the airlines can continue growing their profits, it should drive demand for new aircraft which are frequently leased rather than bought (major airlines typically lease between 20% and 40% of their aircraft).

Overall, I have Fly Leasing as my top high yield pick to play a rebound in the airline industry.

Risks: Due to its close ties to the airline industry, Fly Leasing is subject to similar risks that affect airline health although at lower levels. Except in cases of bankruptcy (and even then it's not always the case), airlines are already tied to extended lease terms and cannot simply return the planes due to less optimal industry conditions.

However, airlines can refuse to take up new leases hurting the releasing rate of commercial aircraft leasing companies, Fly Leasing included.

Fly Leasing also carries a risk of share dilution with a 2013 offering increasing outstanding shares from 28 million to 41 million. While this would not necessarily be repeated, it does show management's willingness to dilute shareholders even given a strong leasing environment.

Takeaway

For dividend investors looking for more reasonable valuations, Laurentian Bank, Delta, Ford, COPEL, and Fly Leasing are worth a look to generate income while paying well below the market average.

Right now I am long Delta and Ford and am considering adding the others to my portfolio over the next few months.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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