Dividend stocks have gained in popularity since the 2008 recession, due to the continuation of the low interest rate environment. Investors continue to look at low-yielding bonds and fixed-income investments with limited options to try to find the additional yield in their portfolios they were accustomed to prior to the recession. The low-rate environment has been a boon for stocks, and investors have continued to cozy up to dividend stocks as they seek yield in addition to capital gains.
Of course, not all dividend stocks are equal, and it is important to ensure the underlying company is healthy and appears likely to continue paying the dividend. Ensuring the dividend stock is backed by ample free cash flow is absolutely key because, as an investor, you want to make sure those dividends continue to pay off. Combining dividends with stocks priced under $5 can be a more aggressive strategy for an investor looking for yield in addition to speculative capital gains.
1. AU Optronics Corp.
AU Optronics Corp. (NYSE: AUO) is a semiconductor company based in Taiwan that creates thin film crystal displays (TFT-LCDs) for flat panel HDTVs, computers, tablets and mobile phones. The company also has a solar business that develops solar panels, systems and supporting hardware. As of October 2015, AU Optronics Corp. trades at $3.04 and has a dividend of 4.87%.
While the stock is experiencing rough performance thus far into 2015, falling nearly -40%, analysts are beginning to turn bullish on the flat screen manufacturing industry as low expectations are already believed to be priced into the stocks. On Sept. 1, 2015, analysts at Barron’s upgraded AU Optronics Corp. to an outperform rating with a price target of $4.
The decline in AU Optronics Corp. certainly has created some value for the stock. It has a price to earnings of 4.46; price-to-book ratio of 0.52; price to cash of 0.98; and price to free cash flow of 2.02. The company has limited debt to equity of 0.70 but a decent cash of around 3.15 per share. Just taking a closer look at free cash flow, AU Optronics was able to increase free cash flow 104% from 2013 to 2014.
2. Lloyds Banking Group
Lloyds Banking Group plc (NYSE: LYG) is a large, multinational bank based in the United Kingdom. Lloyds offers retail and commercial banking solutions, insurance, loan services, savings and more. The bank operates under Lloyds Bank, Halifax and Bank of Scotland entities, and was founded in 1695. The stock trades at $4.77 and has a dividend yield of 1.89%.
The U.K. bank reached a high of $5.60 in 2015 but has since corrected to current levels. However, the stock is still up nearly 5% year to date. While the bank has struggled since being bailed out by the U.K. government, investors are beginning to get excited about Lloyds’ future. Meanwhile, the U.K. government plans to begin divesting its holding in Lloyds Bank around spring 2016.
Lloyds Bank has a price to earnings of 43 and a forward price to earnings of 15.5. While Lloyds is by no means a bargain, the stock has a price to cash of 0.22 and a price to free cash flow of 1.42. Lloyds Bank has an astounding pile of cash on hand at about 21.29 per share, while debt to equity stands at 2.11. Lloyds’s cash flow was not always this impressive, however. Back in 2013, the bank reported negative free cash flow of -18.5 billion GBP. Luckily, it was able to bounce back in 2014 with full-year free cash flow of 6.9 billion GBP. Cash flow is on track to continue growing in 2015.
3. Nevsun Resources Ltd.
Nevsun Resources Ltd. (AMEX: NSU) is a mining company based in Canada that specializes in copper, gold, silver and zinc. Nevsun’s main mining operation is within the Bisha property, located in Northeastern Africa. Nevsun is able to produce 150 million pounds of copper per year with its operations. However, it is in the process of transitioning part of its mine from copper to zinc, as a global deficit in zinc is seen on the horizon. The stock trades at $3.14 and has a dividend yield of 5.10%.
Falling commodity prices of copper, zinc, gold and silver contributed to a steep, late summer sell-off for Nevsun. With that said, it appears the company found support in September and is looking to test upside resistance.
After falling -16.5% year to date, Nevsun appears to have some interesting fundamentals. Price to earnings is at 9; price to book is undervalued at 0.92; price to cash is at 1.38; and price to free cash flow comes in at an impressive 4.74. Additionally, the mining company has no debt and cash per share of 2.27. As the Bisha mine is one of lowest-costing mines for copper in the world, Nevsun has a profit margin of nearly 28%.