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By Faisal Humayun, InvestorPlace.com
A lot of quality dividend stocks are unaffordable for small investors. For example, Costco Wholesale (NASDAQ:COST) trades near $800. With limited funds, creating a well-diversified portfolio of high-priced stocks is impossible. Fortunately, the markets have low-priced dividend stocks to buy with an attractive outlook regarding dividend growth and capital gains. This column focuses on three ideas that can deliver robust returns in the next 24 to 36 months.
As an overview, precious metals, industrial commodities and energy are attractive asset classes to buy. Multiple rate cuts are in the cards for the next 12 to 18 months. This will translate into positive price action in these asset classes.
Undervalued companies in these sectors are likely to benefit from higher realized prices. This will translate into revenue growth, EBITDA margin expansion and potential dividend growth. Backed by these positives, these undervalued dividend stocks to buy can also witness a strong rally.
Kinross Gold (KGC)
Gold has been surging and trades at $2,450 an ounce. With potential rate cuts likely in the year’s second half, I expect the positive momentum for the precious metal to be sustained. Exposure to gold mining stocks is one way to benefit from gold price upside. Kinross Gold (NYSE:KGC) looks attractive among the low-priced bets.
It’s worth noting that KGC stock has been in an uptrend with returns of 52% in the last 12 months. The stock, however, remains attractively valued at a forward P/E of 16.5 and offers a dividend yield of 1.5%. Considering the cash flow outlook on higher realized prices, I expect robust dividend growth.
Earlier this month, Kinross reported Q1 2024 results. Adjusted operating cash flow for the quarter was $424.9 million. With gold trending higher, Kinross will likely deliver annual OCF close to $2 billion. Further, the company ended Q1 with a liquidity buffer of $2 billion.
Therefore, with strong financial flexibility, I expect aggressive investments to boost production and benefit from higher realized prices. Kinross will likely pursue acquisitions to increase its visibility for production growth.
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Borr Drilling (BORR)
Crude oil trades at $80 and has been subdued on macroeconomic headwinds. However, with the possibility of expansionary monetary policies, it’s a good time to remain invested in the energy sector. Once oil trends are higher, the rally in quality energy stocks will likely be significant from undervalued levels.
Borr Drilling (NYSE:BORR), an offshore shallow-water drilling contractor, is poised to surge higher. Further, BORR stock offers a dividend yield of 1.7%, and I expect healthy dividend growth in the next few years.
The first positive to note is that Borr ended 2023 with an order backlog of $1.75 billion. If oil trends increase, the order intake will remain strong and the revenue visibility robust.
It’s worth noting that Borr reported adjusted EBITDA of $351 million last year. The company has already guided for an adjusted EBITDA of $525 million for the current year. The potential upside in cash flows underscores my view on dividend growth.
Vale (VALE)
Vale (NYSE:VALE) stock is another name among dividend stocks to buy with high return potential. The stock trades at a forward P/E of 5.4 and offers a dividend yield of 8.46%.
One reason to be bullish on Vale is the upside in iron ore. The metal has climbed to a 3-month high on the back of China’s stimulus to support the property sector. Potential rate cuts would be another catalyst in the coming quarters.
Specific to Vale, iron ore production for Q1 2024 was at the highest level since 2019. The company also reported healthy copper and nickel sales.
With the possibility of a higher realized price, Vale is positioned to deliver robust cash flows. For Q1 2024, the company reported free cash flow of $2 billion. It would not be a surprise if annual FCF is close to $10 billion. This provides ample flexibility for big investments and dividend growth. Considering the deep valuation gap, I also expect a sharp rally for VALE stock after an extended period of consolidation.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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