3 Cheap Dividend Stocks That Could Be Top Stocks in 2015

By Markets Fool.com

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Source: Flickr userSimon Cunningham.

It's been proven time and time again that long-term investing out performs short-term trading. It's also been shown that investing in dividend paying stocks leads to better returns than investing in non-dividend paying ones. But knowing if the time is right to buy a dividend stock is never easy, especially given that the shares of many dividend paying companies are at all-time highs. With that in mind, I crunched the data and discovered three dividend paying companies that are inexpensive, but also have catalysts that could make them top stocks to own next year. Read on to learn which three dividend-paying companies I think could head higher in 2015.

Sitting in the middle
In many industries, some of the most successful businesses are the ones that sit in between manufacturers and consumers. These wholesalers and distributors, such as hospital supplier Owens & Minor help keep prices low by leveraging the purchasing power of many consumers while providing one-stop-shopping simplicity.

Owens & Minor may not be a household name, but it's one of the biggest hospital suppliers, employing more than 5,100 people and operating over 50 distribution centers. Owens & Minor's ability to make life easier for time-strapped and cost-conscious hospitals means that the company serves thousands of health care providers.

That customer reach suggests that Owens & Minor will benefit as hospital utilization picks up next year. Ahead of 2013, the hospital industry was enduring yet another year of falling admissions as cash-strapped consumers continued to put-off elective procedures. However, in 2014, ongoing economic recovery and an increase in the number of people with health insurance thanks to the insurance exchanges and Medicaid expansion has led to a recovery inhospital admissions. As the number of people with health insurance increases and the economy improves again next year, demand for Owens & Minor products and services should accelerate.

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In the third quarter, growing hospital demand led to Owens & Minor's sales improving by 5.1% year over year to $2.4 billion. Analysts think that momentum will continue into 2015. Analysts expectthat the company's earnings per share will climb from an estimated $1.75 this year to $1.93 next year, which means that investors are paying just 0.24 times sales and about 18 times forward earnings per share to own the stock. That seems to me to be a pretty reasonable valuation for the company, particularly given that the company has a history of boosting its dividend payout and its shares already offer a healthy dividend yield of 2.9%.

OMI Dividends Paid (TTM) data by YCharts.

Speaking of aging America
Few companies may be better suited to benefit from aging baby boomers than Kindred Healthcare . The company owns hospitals, rehab centers, and provides home health care, nursing home care, and hospice care, too.

Kindred is already a market leader in its industry, but its purchase of home health competitor Gentiva makes it an even bigger player that could increasingly win over investors in the coming year.The $1.8 billion acquisition nets Kindred an additional 500 home health, hospice, and community care centers, and Kindred believes it will be able to significantly reduce expenses once the acquisition is completed early next year. Following the acquisition,Kindred's annual sales will increase to more than $7 billion, but revenue could head even higher if Kindred executes on its referral strategy. For example, rehab hospitals are a natural referral source for home health care, and home health care is a natural referral source for hospice care. If the company can leverage its Gentiva deal for margin growth and if referrals boost revenue, Kindred may be able toover-deliver on analysts forward estimates in 2015.

Source: Kindred Healthcare.

In the third quarter, Kindred's sales grew 6% from a year ago and analysts think Kindred's earnings per share will grow from $1.03 this year to $1.11 next year. If the company meets or beats that estimate, it may be able to increase its dividend beyond its current 2.4% yield. Regardless, since Kindred is trading at just 0.24 times sales and 17.3 times forward earnings, dividend investors may want to own this company.

Reducing its biggest risk
Share prices for Teva Pharmaceuticals took it on the chin in 2013 over fears of competition for Copaxone, its top-selling multiple sclerosis drug. Copaxone revenue totals roughly $4 billion per year, accounting for about 20% of Teva's sales, so investors were right to worry that generics would eat significantly into the company's top and bottom lines when Copaxone lost patent protection this year.

However, those fears may have been overblown. Copaxone is a biologic that is hard to replicate, and while competitors including Mylan are lobbying for FDA approval of their own generic versions of the drug, it's not certain when their biosimilars might win approval, or how much market share they'll eventually capture. With every month that passes without an approved generic on the market, Teva is able to convert more patients from its original Copaxone formulation to a new, long-lasting version that enjoys further patent protection (helping shield it from competition). Exiting the third quarter, roughly 57% of all Copaxone scripts being written are for this new formulation.

Thanks to the company's success in protecting its Copaxone market share, Teva's shares have been a top performer this year, but there could still be more upside next year. If a generic Copaxone remains on the sidelines, and Teva continues to convert patients to the new formulation, then the company may be able to outperform analyst's expectations for $5.07 in earnings per share next year. If so, it could give Teva the room to increase its dividend payout, which is something the company has a solid track record of doing over the past decade. Currently, the dividend yield is about 1.9%.

TEVA Dividends Paid (TTM) Chart

TEVA Dividends Paid (TTM) data by YCharts

Regardless, since the majority of Teva's sales come from other products, including its vast generic drug product portfolio, the long-term opportunity may be worth any short-term bumps in the road. That's because investors aren't really paying a lot for Teva's expected earnings; the company's price to earnings ratio is just 11.3.

And one more thing
Owens & Minor, Kindred Healthcare, and Teva Pharmaceuticals all operate businesses that are leaders in their respective industries. They're not fly by-night companies, and their business models are arguably far less risky than other dividend plays. Inevitably, there are likely to be fits and starts for these companies, but each generates plenty of dividend-friendly cash flow that could be used to reward investors over the coming years, and that suggests they may be worth consideration for investor portfolios in 2015.

The article 3 Cheap Dividend Stocks That Could Be Top Stocks in 2015 originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.