Look up the term “retirement stocks,” and you’ll pull up many lists, often listing the same basket of widely held, blue-chip stocks. But while a portfolio of such names could provide you with the income and capital growth needed for your golden years, you may want to consider adding a few undervalued retirement stocks into the mix.
In other words, stocks that either sport higher dividend yields than the lauded “dividend aristocrats,” and/or sell at a lower valuation. Such names could help you in two ways. First, stocks with high-yet-sustainable yields could help you maximize portfolio income.
Second, some of these undervalued names could see price appreciation. Either due to market conditions normalizing, or from fixing company-specific issues that are causing negative sentiment at present.
That’s the story here with these seven undervalued retirement stocks. Each one offers an above-average dividend, plus upside potential.
- Devon Energy (DVN): Continued high oil and gas prices will keep this stock sporting a high dividend yield.
- Enbridge (ENB): Slow-and-steady energy play, reasonably priced with a high dividend.
- Gladstone Commercial (GOOD): There's a low chance of it becoming a case of chasing yield gone wrong.
- IBM (IBM): Further turnaround success could send "Big Blue" to higher prices.
- Altria Group (MO): Concerns of a secular decline for this tobacco giant may be overblown.
- AT&T (T): Improving its telecom business and reducing debt, could enable it to continue moving higher.
- Western Union (WU): Consider making a contrarian wager, this old-school payments company doesn't get disrupted out of business.
Skyrocketing oil and gas prices have resulted in a similar move for shares in Devon Energy (DVN). This independent energy company is up around 70% year-to-date alone, and up 151% over the past twelve months.
But don’t take that to mean you have missed out on DVN stock. If you’re bullish on energy prices staying high, it’s a great opportunity. If oil and gas prices remain elevated, it will keep reporting high earnings. This may enable it experience further multiple expansion. Shares today trade for around 8.9x earnings.
In terms of its appeal to retirement investors, high energy prices will result in very high dividends as well. Devon pays a fixed-plus-variable dividend. That is, its dividend moves higher or lower based on earnings. If high oil prices aren’t going away, it will continue to sport a high yield (6.66% at current prices).
Enbridge (ENB) is a great “safe and steady” energy stock. Based in Canada, Enbridge is a large owner of oil and gas pipelines. Changes in energy prices do not materially impact its earnings. If you’re less confident oil and gas will remain at prices not seen in over a decade, this may make a better choice.
Trading for around 20x earnings, ENB stock may not sound “cheap” on the surface. Yet it may be a more than fair price to pay, given the consistency of its dividend. At current prices, it has a forward dividend yield of 5.66%.
With 10 years of consecutive dividend growth, it has increased its payout by an average of 9.58% per year over the past five years. If you’re looking for steady returns via dividends, Enbridge is a solid choice. Moving higher in recent weeks, consider it a buy.
Gladstone Commercial (GOOD) is another of the high-yield undervalued retirement stocks to consider. This real estate investment trust (REIT) has never missed a dividend payment, with zero dividend cuts.
This stability, plus the fact it pays out its dividends monthly rather than quarterly, makes GOOD stock appealing for dividend investors. You can argue that it’s not “undervalued,” in the traditional sense. It doesn’t trade at a discount to its book value. Its valuation on a price/funds from operations (P/FFO) doesn’t scream “deep value,” either.
So then, why consider it a buy? It may be a great vehicle for high yield with limited downside risk. After its pullback in recent months, investors buying today can get a 7.38% annual return via dividends. Its payout consistency suggests a low chance of it becoming a case of yield chasing gone wrong.
Up slightly year-to-date (around 4%), with IBM (IBM), market volatility has been outweighed by investors buying into it as a safe harbor play. That’s not all. “Big Blue” has reported strong results in recent quarters.
While obviously a mature tech company, don’t assume that it’s a “dinosaur.” There’s more to like with IBM stock besides its 4.71% dividend yield. The company’s solid fiscal performance has been in large part to its so far successful turnaround. Shedding legacy businesses, it is now focused on its cloud computing and artificial intelligence (AI) segments.
This could result in steady earnings growth for previously low-growth IBM. In turn, a higher stock price. Due to both its increased earnings, plus a possible expansion of its forward earnings multiple. Offering both a high yield, and upside due to its current low forward multiple (14.3x), investors building a retirement portfolio should take a look.
Altria Group (MO) is another stock that has benefited by the move to “risk off” in recent months. Attracted by its steady earnings and high dividend (6.65% yield), shares in this company, parent of tobacco giant Philip Morris USA, are up around 11% in 2022.
Granted, this sin stock may not be for everybody. There’s no getting around the controversial nature of its business. Not only that, there’s the concern that changes in U.S. tobacco use trends will drag earnings lower over time.
Yet concerns of secular decline may be overblown. Altria could make up for declining cigarette sales through price increases, plus the move of cigarette users to Altria’s other non-cigarette tobacco products. This will enable continued slow and steady earnings/dividend growth. Consider MO stock a buy because of its high yield (6.65%) at a low price (11.x earnings).
A lot has changed with AT&T (T) in recent months. It has divested its media business. The telecom company is now purely “Ma Bell” once again. Unfortunately, it has also slashed its dividend.
Even so, since the spinoff of Warner Bros. Discovery (NASDAQ:WBD), the “new” T stock has inched higher. While no longer as high-yield as before, a 5.24% dividend is nothing to sneeze at. The company also continues to trade at a low valuation (8.3x). Yes, this stock has a reputation as a “value trap.”
Yet it could be in the process of shaking off this reputation. Now streamlined, management can focus on improving the profitability of its telecom business, de-lever AT&T’s balance sheet, and make other moves that may enable it to make a further recovery. With steady returns via its payout, plus the potential for upside, add it to your watchlist.
Western Union (WU) is another name you can consider to be an undervalued retirement stock. It trades at a low multiple (around 10x), and has a 5.27% forward dividend yield. It’s also a bit of a contrarian play.
The rise of fintech is seen as a possible threat to its old-school payment remittance business. However, like I argued late last year, it may be too soon to say that it will be “disrupted” out of business. Around since the 1850s, it’s no stranger to keeping up with the times.
It may prove the market wrong with steady earnings. Also, it could continue increasing its dividend payout. All of this may result in a move to higher prices for Western Union stock. If you’re looking for a play where going against the grain may pay off, this may be it.
On the date of publication, Thomas Niel held a LONG position in MO stock. He did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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