3 Top Dividend Stocks Selling for a Discount This Fall

Markets Motley Fool

Time and again, it's dividend stocks that form the foundation of the top retirement portfolios. That's because dividend stocks bring three key advantages to the table for long-term investors.

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To start with, dividends are often the sign of a profitable company. In other words, a company and its management team wouldn't be paying out a dividend if it didn't expect to remain healthfully profitable. Thus, a dividend is a beacon that can help attract income seekers to time-tested businesses.

Second, a dividend payment can help you hedge against inevitable downturns in the stock market. Since 1950, data aggregated by Yardeni Research shows that there have been 35 stock market corrections of at least 10%, when rounded to the nearest whole number, in the S&P 500. This suggests corrections are quite commonplace. While a dividend payout is unlikely to completely erase a paper loss incurred during a stock market correction, it can certainly help ebb anxieties caused by temporary paper losses and keep you focused on your long-term investing goals.

Finally, but most important, you get the opportunity to reinvest your dividend payouts into more shares of stock. A dividend reinvestment plan, or Drip, allows you to purchase more shares of dividend-paying stock with your payout, leading to a larger dividend in the future and more shares of stock in a compounding fashion. Drips are a commonly used tool among money managers to boost the wealth of their clients.

These top dividend stocks are selling for a discount

Even though the S&P 500 has motored higher by 15% over the trailing year through Sept. 25, 2017, quite a few top-notch dividend-paying stocks are down for the year. In fact, a quick screen of all stocks with a market cap of at least $2 billion with a dividend yield of 2% or higher shows that more than 210 are down on a trailing-12-month basis. Among these more than 210 stocks, three stand out as top dividend stocks that appear to be selling at discounts this fall.

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Foot Locker

Talk about a company that got completely trampled in August. Footwear and accessories retailer Foot Locker (NYSE: FL) wound up plunging 28% in a single day after reporting disappointing second-quarter earnings results that saw its total sales and same-store comps fall a respective 4.4% and 6% over the prior-year period. The company also missed sales and EPS consensus estimates by a mile. Foot Locker pegged a lack of innovative new styles in its stores, as well as a discernible shift in consumers' mobile-based buying habits, for its recent weakness.

While its quarter was nothing short of disastrous, and it's unlikely to see anything in the way of a quick turnaround, at less than nine times forward earnings, and sporting a 3.7% yield, Foot Locker could be worth a serious look.

Though it'll take time, Foot Locker is making the necessary investments in mobile-based technology that'll better allow it to understand the buying habits of its customers, and perhaps attract them back to stores and away from e-commerce giants such as Amazon.com, which has partnered with Nike to sell its flagship sneakers. These investments, coupled with a reduction in capital expenditures and underperforming store closures, should allow the company to buoy margins during this rough patch.

In addition, investors appear to be discounting the cash on hand that Foot Locker could put the work. Currently valued at $4.3 billion as a company, Foot Locker had $1.04 billion in cash and just $126 million in debt as of the end of Q2. With somewhere in the neighborhood of $200 million to $500 million in annual free cash flow, we could see half of Foot Locker's valuation derived from its cash positon, assuming its share price was stagnant, by the turn of the decade. This cash provides a solid investment floor and gives it ample flexibility to make investments for its future.

Foot Locker has historically also done a very good job of attracting consumers through the use of recognized brand ambassadors. It wouldn't be surprising to see Foot Locker aggressively pursue athletes or entertainers in an effort to forge connections between it and consumers.

Yes, the march forward could get bumpy at times, but Foot Locker has the cash flow to maintain its premier dividend.

HCP, Inc.

Another tempting top dividend stock this fall that's been beaten up over the past year, but which appears to represent excellent value at present, is HCP (NYSE: HCP).

HCP is a real estate investment trust (REIT) that invests in healthcare properties, such as hospitals, life-science buildings, medical office buildings, and senior housing facilities. Because it's a REIT, it's required to pay out at least 90% of its profits in the form of a dividend to shareholders, in exchange for some hefty tax breaks. This rule, along with HCP's 21% decline over the past year, is why its yield has been pushed all the way up to 5.2%.

Why the decline? Much of it has been attributed to HCP's spin-off of HCR ManorCare into Quality Care Properties, which contained hundreds of skilled nursing facilities that had been dragging on HCP's results. A combination of federal regulations and weaker demand led HCP to the decision of spinning off this segment into a separate company. But replacing approximately $500 million in earnings that came with these skilled nursing centers wasn't possible, at least in the short term. Long story short, HCP's quarterly payout fell from $0.575 to $0.37, and those who don't follow HCP too closely were not too pleased at the reduction.

However, with HCR ManorCare gone, HCP is a much leaner, healthier company -- and the data proves it. What's left is a portfolio of medical office and life-science buildings that are experiencing high demand, as well as a portfolio heavily swayed toward independent senior housing as opposed to assisted living. There's been no glut in supply for independent senior housing, meaning no margin deterioration for HCP.

HCP also benefits from the simple trend that we're living longer than ever. The U.S. Census Bureau estimates that the elderly population will nearly double between 2015 and 2050, from 48 million to 88 million. Since the elderly require more medical care than younger adults, HCP is in a prime position to benefit from higher rental property demand for medical office buildings, life-science buildings, and senior housing properties.

The company has also managed costs and its debts well. Since 2010, the average maturity on its debt has been pushed out to 6.4 years, while its average interest rate paid on that debt has dropped by roughly two percentage points to 4.1%. This means more financial flexibility and potentially higher margins, especially with its skilled nursing care portfolio fully divested.

HCP looks to be a dividend juggernaut you can trust in the REIT space.

Wheaton Precious Metals

Lastly, income seekers looking for top dividend stocks at a discount might want to give Wheaton Precious Metals (NYSE: WPM) and its 2.1% yield a long look, following its 30% decline over the trailing year.

Why has Wheaton Precious Metals, a precious-metals royalty and streaming company, suddenly lost its luster? Some of the blame could be from the underperformance of silver relative to gold. Over the trailing year, spot gold is down by about 2%, while spot silver has tumbled by approximately 13%. Since Wheaton's margins are directly affected by spot prices, weak silver pricing has taken its toll.

Wheaton Precious Metals has also run into a hiccup at the San Dimas silver mine, where labor disruptions and unreliable underground equipment in the Mexican mine have reduced the amount of silver produced, affecting the company's top and bottom lines. 

Nevertheless, there's a lot for long-term investors to like about a gold and silver streaming company like Wheaton Precious Metals. To begin with, it offers a lot of production diversity. Though the San Dimas mine adversely affected its Q2 results, its other properties helped make up for the shortfall. Silver Wheaton's numerous contracts and mining partners are set up in such a way that problems at a single single mine can't sink this ship.

Along those same lines, we've seen a notable shift from Wheaton Precious Metals over the past couple of years in that it's reduced its reliance on silver, which is a more illiquid and volatile spot metal, in favor of gold. According to estimates from the Bank of Montreal, Wheaton Precious Metals is expected to generate about half its revenue from silver, and the other half from gold, this year. A more balanced production portfolio should lend to more stable long-term growth.

Don't forget that the company also benefits from a cost perspective relative to traditional miners. As a royalty and streaming company, it merely provides upfront capital to fund new and expansion projects in exchange for a percentage of production at a well below market price. It has no day-to-day mining operations to concern itself with, which keeps its expenses way down and its operating margins exceptionally high.

As long as the demand outlook for gold and silver remains bullish, and uncertainty continues to push investors to safe-haven assets such as gold and silver, Wheaton Precious Metals should have a bright future.

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Sean Williams owns shares of Wheaton Precious Metals. The Motley Fool owns shares of and recommends Amazon and Nike. The Motley Fool has a disclosure policy.