3 Cheap Dividend Stocks That Could Rally Higher

By Markets Fool.com

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Dividend stocks have been shown to outperform non-dividend-paying stocks, so it's not too surprising that investors have been tucking more dividend-paying companies into their portfolios. While many dividend stocks are trading at historically high price valuations, these three dividend stocks could be bargains worth buying.

No. 1: Thank the cloud

Seagate Technology (NASDAQ: STX) has seen its sales slip as demand for PCs has waned, but a pick-up in demand for hard drives from companies providing cloud-based solutionscould put Seagate Technology's sales back on track soon.

Seagate's biggest competitor,Western Digital, recentlyupped its sales and profit outlook, citing an improving product mix. That improvement is likely due to rising demand for cloud memory solutions, and if it is, then Seagate should see a bump in its business, too.

Seagate has already said that demand from cloud service providers was better than expected in Q2 after "several quarters of relatively modest demand." They also said that a shift "from client server to mobile cloud applications and storage environments" will contribute to future "revenue growth, product gross margin improvements, and improved profitability."

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We won't know for a bit longer whether Seagate's business is stabilizing, but investors willing to take on the risk of buying Seagate's shares could end up getting paid handsomely. Despite a 16% rally in Seagate's shares last month, they still yield a market-trouncing 7%.

No. 2: A long-awaited turn

After losing patent protection on its megablockbuster cholesterol drug Lipitor in 2011,Pfizer Inc.'s (NYSE: PFE) sales have been sliding for years. Fortunately, that trend may be ending.

Pfizer has notched six consecutive quarters of operational growth through Q2, and thanks to newly launched superstars, including the breast-cancer drug Ibrance, management thinks revenue will eclipse $51 billion this year. If they're correct, then Pfizer will deliver its first year-over-year top-line growth since 2011.

PFE Revenue (Annual) data by YCharts

Pfizer's return to sales growth, cost-cutting during its lean years, and a slate of recent acquisitions suggests Pfizer is about to become an increasingly profitable company.

Pfizer expects to deliver $2.38 per share in earnings this year, up from $2.20 last year, and assuming the trend continues, there should be plenty of financial firepower available to increase its dividend payout. Since shares are already yielding a healthy 3.5%, stashing this company's shares away now may be savvy.

No. 3: Navigating a tough market

ExxonMobil Corporation(NYSE: XOM)is an energy giant that makes its money by discovering and refining oil and gas, and because it boasts one of the industry's healthiest balance sheets, it ranks as my top pick for dividend-hungry investors looking to buy energy stocks.

Oil and natural gas prices have nose-dived in the past year because of surging global production and tepid global economic growth, butExxonMobil's refining and chemicals operations have offset much of that drop in commodity prices, and as a result, the company reported $1.8 billion in earnings in Q1 and $1.7 billion in earnings in Q2.

Although the company's first- and second-quarter sales trends put it on track to earn far less than the $16.2 billion it made last year, oil and natural gas prices won't be low forever. When they do improve, ExxonMobil's cost-cutting this past year may give it more profit-friendly leverage than it's had in the past.

ExxonMobil still has the financial firepower necessary to acquire assets from its peers at bargain-basement prices, and it's got the cash flow necessary to keep dividends flowing to investors. Since ExxonMobil has increased its dividend by an average 6.4% per year over the past 33 years (it currently yields 3.45%) and its shares can be bought cheaper than they've been in the past, there's a lot to like about buying this stock on sale.

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Todd Campbell has no position in any stocks mentioned.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.Like this article? Follow him onTwitter where he goes by the handle@ebcapitalto see more articles like this.The Motley Fool owns shares of ExxonMobil and Western Digital. 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.