Investors often need a regular income from investments. With bonds, such income comes in the form of coupon payments available at a pre-defined payment frequency. In the case of stocks and mutual funds, income comes from dividend payments.
While bond issuers are required to make bond coupon payments, dividends may or may not be paid by the company management depending on business developments and circumstances. Although companies are not obliged to make dividend payments, many do for various reasons: retaining investor confidence, sharing surplus income with shareholders, not having suitable projects to invest that surplus cash at the time. (For more, see How Dividends Affect Stock Prices.)
Dividend payments essentially take money out of a company’s working capital. If a company were to keep and reinvest that money in business projects, it could earn higher returns. So, when dividends are paid, the stock starts trading at a discounted price.
Still, there are a few stocks that not only pay regular dividends but also maintain high valuation and growth potential despite making regular dividend payments.
Criteria for High Dividend and High-Value Stocks
The dividend yield is a ratio of dividend amount expressed as a percentage of current share price. Along with the high frequency of dividends (i.e., quarterly payments), the dividend yield above 2.5% is desirable and indicates high dividend-paying stocks.
Stock valuation may be affected by many factors such as price-earnings ratio (P/E ratio), earnings per share (EPS), and the price-to-book ratio (P/B ratio). A modified version of the widely followed PE ratio is the price/earnings to growth ratio (or PEG Ratio), which is the P/E ratio divided by the forecasted growth rate.
As an investor, you want to invest in businesses whose share price is less and that have high earnings and high growth potential. A lower PEG value indicates an undervalued company that's available for a low share price and which has a high potential for growth. Also, look for businesses that have a PEG ratio of less than three.
To exclude penny stocks and other inconsistent cases, stocks are picked with other criteria like those having share prices greater than ten dollars and those with a market cap greater than one billion dollars.
The Top Value Stocks Paying High Dividends
This list isn't inclusive but indicative and presented in random order from an array of industry sectors.
1. Abercrombie & Fitch Co. (ANF). ANF is a global apparel retailer that operates through multiple subsidiaries. It runs its business through three segments: U.S. and international stores, as well as direct-to-consumer. It operates more than 780 retail locations in the United States and more than 170 in Canada, Europe, Asia, and the Middle East. ANF has a regular history of making quarterly dividend payments with a high dividend yield of 3.98%. Its low PEG ratio of 1.11 indicates a strong growth potential compared to its current valuation, as suggested by its current share price (hovering around $20.4) and a market cap of $1.41 billion.
2. Energy Transfer Equity (ETE). ETE is listed on the NYSE and operates in energy-related and transportation sectors. It owns and operates more than 12,800 miles of interstate natural gas pipelines in America, three natural gas storage facilities in Texas, and other treatment services like compression, cooling, dehydration, and thermal unit management. It has paid regular quarterly dividends with a high dividend yield of 2.87%. Additionally, in the last 20 months, it has gone for two stock splits. It has a PEG ratio of 1.5, indicating a high growth potential.
3. Maiden Holdings Ltd. (MHLD). NASDAQ-listed MHLD is into reinsurance solutions and operates in the United States and Europe; it has a limited presence in other global locations. MHLD operates through two segments: diversified reinsurance (DR) and AmTrust reinsurance (AR). DR covers property and casualty reinsurance while AR covers small commercial reinsurance, specialty risk, packaged products, and auto and credit life insurance. MHLD has been paying dividends every quarter since 2008. With a market cap of around $22 billion, it has a low PEG ratio of only 0.82, indicating high growth potential for the future.
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4. Eaton Vance Corp. (EV). Eaton Vance is listed on the NYSE and manages, markets, and creates investment funds in the United States. It also offers investment management solutions and counseling services to individuals and institutions. With a market cap of almost $4 billion, EV has been paying quarterly dividends with a dividend yield of 2.87%. It has a PEG ratio of 1.5, making it a good value stock with high growth potential.
5. Compass Minerals International Inc. (CMP). NYSE-listed Compass Minerals is in the diverse chemicals and metals and minerals business. It operates in North America and the UK. It mines, produces, processed, distributes and markets various chemicals, salts and minerals for industrial, commercial and agricultural uses. With a low PEG ratio of 0.92, it is a regular dividend payer with quarterly payment frequency. It has a stable market cap of $2.87 billion and a high dividend yield of 3.08%.
6. GATX Corp. (GMT). NYSE-listed GATX Corp is in the business of leasing, operating, managing, marketing, and remarketing necessary assets in rail and marine markets in the United States and globally. Founded in 1898, it has 17 vessels and more than 126,000 cars today. It is a regular quarterly dividend-paying company with a high dividend yield of 3.15%. It has a PEG value of 0.77 only, which indicates its high growth potential relative to the current share price.
The Bottom Line
High dividend payments alone may not be the best indicator of a company’s health. It may also indicate that the company doesn't have sufficient business or projects to use the available money, so it's paying it out to shareholders. Dividend payments should be looked at with consistent amounts paid at a regular frequency instead of sporadic high amounts. Studying regular and consistent dividend payments with high valuation indicators (like PEG) can yield the best of both worlds: a steady income and value appreciation. Investors should regularly track necessary value indicators for their investments. Because they're based on forecasts of growth factors, these may change drastically. (For more, see Value Investing.)