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Frequent dividend payments can provide a financial cushion during your retirement years and also help with current expenses. Companies that offer dividends give shareholders more reasons to hold onto shares during good times and bad times.
When the bad times come, the stock market can present opportunities to investors. Stock valuations get lower, and some dividend stocks suddenly look like bargains. Buying shares in undervalued companies gives you a greater margin of safety and a higher dividend yield. Finding undervalued dividend stocks can help you secure higher yields for stable corporations that have ample cash flow and earnings growth to support future dividend hikes.
These three top dividend stocks to buy have seen their stock prices fall a bit lately but are still enticing choices for long-term investors.
| SYMBOL | COMPANY | PRICE |
|---|---|---|
| PRU | Prudential Financial | $85.39 |
| PSA | Public Storage | $287.76 |
| BAC | Bank of America | $28.57 |
Prudential (PRU)
Prudential (NYSE:PRU) has had a tough start to 2023, with shares down roughly 16% year-to-date. The company reported decreases in revenue and earnings for each quarter in 2022, but the most recent earnings report suggests Prudential is on the right track. In Q1 2023, Prudential reported $1.46 billion in net income and $17.05 billion in revenue.
If Prudential continues reporting results like the first quarter, the P/E ratio will condense and support further capital appreciation. Prudential’s forward P/E ratio sits a tad below 7, which is lower than Prudential’s historical P/E ratio, which has ranged from 8 to 10. Once the bad quarters go in the rearview mirror, the P/E ratio can reach a more reasonable level.
The company’s exposure to commercial real estate presents a risk, but Prudential’s leadership feels confident about continuing the streak of good quarters. The company recently announced a dividend hike from an annualized $4.80 dividend per share to an annualized $5 dividend per share. This dividend hike represented a 4.17% year-over-year increase and brought the dividend yield above 6%. The current dividend and adjusted book value per common share of $97.29 helps establish Prudential as one of the high-yield, undervalued dividend stocks to consider.
Public Storage (PSA)
Public Storage (NYSE:PSA) is a real estate investment trust that acquires and maintains self-storage properties. The company has been volatile in 2023 but is up 5% year-to-date. The stock is down almost 20% from its all-time high and is reasonably valued. The company has a 12 P/E ratio and a 4% dividend yield.
Public Storage reported funds from operations (FFO) of $4.08 per diluted share in the first quarter. REIT investors use FFO per share when assessing investments instead of EPS to gauge the dividend’s safety. $4.08 FFO per diluted share is more than enough to cover the quarterly $3 dividend. Funds from operations jumped 11.8% year-over-year, and revenue also increased by 9.8% compared to Q1 2022.
Other public storage stocks like CubeSmart (NYSE:CUBE) and Life Storage (NYSE:LSI) have higher P/E ratios, ticking in at 29 and 30, respectively. These companies are also some of the best dividend stocks for investment capital due to their high yields, but Public Storage has them beat on valuation. All three REITs produced similar year-over-year growth in FFO and revenue.
Bank of America (BAC)
Bank of America (NYSE:BAC) saw its stock price tumble as a result of the Silicon Valley Bank fallout in March. The news shocked many investors and led to a major selloff in bank stocks. Regional banks got hit hard, but the more established banks also saw significant declines.
While Silicon Valley Bank’s downfall created reasonable concern, Bank of America’s stock didn’t have much reason to fall as much as it did. If anything, Silicon Valley Bank’s collapse helped Bank of America, as the large bank reaped $15 billion in deposits a few days after government authorities closed Silicon Valley Bank. Consumers and businesses moved their money into more established financial institutions like Bank of America to mitigate their risk.
Bank of America has done its part with 9.2% year-over-year revenue growth and 15.5% year-over-year income growth in Q1 2023. It’s also the second-largest bank in the U.S. and has over $3 trillion in assets. The company has a P/E below 9, a P/B ratio below 1, and a dividend yield above 3%. You can get higher yields with other undervalued dividend stocks, but Bank of America rarely has a yield above 3%. Bank of America trades below $34/share, the price BAC stock had before the Silicon Valley Bank news gripped the markets. No underlying changes to the company, plus its strong position in the banking industry, suggest the market’s reaction in March was misguided.
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