Many high-yield dividend stocks are now trading at a premium to the market and their industry peers, due to the multi-year bull market and low interest rates inflating demand for income stocks. But with interest rates set to rise this year, investors should be wary of dividend stocks that have historically low yields and historically high valuations.
Continue Reading Below
It might seem tough to find undervalued stocks with high yields in this frothy market. So in this article, I'll highlight three stocks that still trade at discounts to their industry peers while offering yields higher than 3% -- Qualcomm (NASDAQ: QCOM), Verizon (NYSE: VZ), and China Mobile (NYSE: CHL).
Image source: Getty Images.
Shares of Qualcomm, the biggest mobile chipmaker in the world, have fallen nearly 20% since the beginning of 2017 due to an FTC lawsuit regarding the company's licensing practices, several related lawsuits from longtime customer Apple (NASDAQ: AAPL), and mixed first quarter earnings.
The main bear case against Qualcomm is that its core business model -- which uses a high-margin portfolio of patents to support its lower-margin chip business -- could be crippled if it's forced to lower its licensing fees, which many OEMs and regulators claim are too high. Qualcomm's chip business would continue losing market share to cheaper chipmakers like MediaTek and first-party chipmakers like Apple and Huawei. To top it off, the probes and lawsuits could derail its proposed takeover of NXP Semiconductors (NASDAQ: NXPI), which would make it the largest automotive chipmaker in the world.
Continue Reading Below
Meanwhile, the bulls believe that a Republican-led FTC will drop the case, Qualcomm will eventually reach a settlement with Apple, and the NXP deal can still clear its regulatory hurdles.
Regardless of the outcome, the steep sell-off has made Qualcomm shares fundamentally cheap at 14 times earnings -- which is much lower than its industry average of 22. Qualcomm has hiked its dividend annually for 14 straight years, and currently pays a forward yield of 4% -- which is comfortably supported by its payout ratio of 63%.
Shares of Verizon have slipped 10% since the beginning of the year, due to a mixed first quarter earnings report, a (recently dropped) FCC probe of its zero-rating strategies, and uncertainties regarding its planned acquisition of Yahoo's internet business and rumored interest in Charter Communications. All those question marks made Verizon look riskier than its primary rival AT&T (NYSE: T), which dipped just 3% this year.
But that fear also made Verizon a value play at 14 times earnings, which compares favorably to AT&T's P/E of 17 and the industry average of 25 for domestic telcos. The company has also raised its dividend annually for a decade, and currently pays a forward yield of 4.8% -- which matches AT&T's yield. Verizon's payout ratio of 66% also gives it plenty of room for dividend hikes in the future.
Regardless of questions surrounding Verizon's near-term moves, the telco remains thelargest wireless carrier in the U.S., and won't likely lose that title anytime soon. Analysts expect Verizon's revenue and earnings growth to remain nearly flat this year, but the company's low valuation, high yield, wide moat, and expanding digital ecosystem still make it an ideal income play for conservative investors.
Investors looking for an overseas domestic telco might consider buying China Mobile, the biggest wireless carrier in China (and the whole world). The carrier had 849 million customers atthe end of 2016, and a large number of its 2G and 3G users upgraded to higher revenue 4G plans throughout the year. It also has a small but growing wireline business with 79 million customers, which could eventually enable it to launch more comprehensive digital bundles like AT&T and Verizon.
China Mobile is one of three state-owned telcos in China. The Chinese government sometimes rotates its management with that of its two peers -- China Telecom and China Unicom -- to ensure healthy competition between the three players. This prevents China Mobile from ever becoming a monopoly, but it gives it a comfortable safety net which limits its downside during market declines.
China Mobile has a trailing yield of 3.1%, which is supported by a payout ratio of 42%. Its forward yield is uncertain, since it adjusts the payment every year based on its earnings, but its yield has stayed between 3% to 5% over the past five years. Its semi-annual yield might not appeal to income investors looking for quarterly payments, but China Mobile's trailing P/E of 15 makes it a solid value play compared to other foreign telcos, which have an industry average of 18.
The key takeaway
Qualcomm, Verizon, and China Mobile all have wide moats, low valuations, and high dividends. Their near-term growth might seem glacial, but I believe that they all have less downside potential than other income plays, which are trading at premiums to the market -- which makes them solid long-term plays at current prices.
10 stocks we like better than Verizon Communications
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Verizon Communications wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 6, 2017
Leo Sun owns shares of AT and T, China Mobile, and Qualcomm. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends China Mobile, NXP Semiconductors, and Verizon Communications. The Motley Fool has a disclosure policy.