As the market flirts with new record highs, bargains seem to be harder and harder to find. Many reliable dividend payers have seen their share prices soar, knocking their yields down to unexciting levels.
Although you may have to dig to find cheap dividend stocks, there are still a few around. Two dividend payers that look cheap right now are Dow (DOW) and BP (BP 0.38%). Here's why they look like buys at their current prices.
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A young old company
Chemical heavyweight Dow just emerged from its four-year stint as part of merged company DowDuPont in 2019. However, in the year since, it has proven that its streamlined portfolio of "performance chemicals" like coatings, adhesives, and lubricants is perfect for supporting a high-yielding dividend.
Dow's product line mostly consists of chemicals used in industrial applications, and it serves a diversified group of industries, including manufacturing, construction, tech, and healthcare. That diversification allowed it to grow its free cash flow, even during the second quarter of 2020, as outperforming industries like healthcare counterbalanced underperformers like construction and manufacturing.
Dow is also looking undervalued compared to other chemical companies right now. Its price-to-sales ratio and its price-to-free cash flow ratio are at or near the bottom of its peer group, and well below those of the other former DowDuPont components DuPont (DD -0.79%) and Corteva:
DOW PS Ratio data by YCharts
Meanwhile, Dow's 6.2% current dividend yield is higher than almost all of its peers' -- only German behemoth BASF's is higher at 6.3%. With a high yield, a low valuation compared to its peers, and consistent cash flow generation, Dow looks like a dividend stock worth buying.
A new direction
The oil industry has seen better days. After March's oil price collapse -- the second major oil price downturn in the last six years -- the oil and gas sector has been hit with a wave of dividend cuts, reduced spending, and bankruptcies.
One company that cut costs and slashed its dividend in half was oil supermajor BP. Unlike its peers, however, BP announced a major new initiative, shifting its focus away from oil toward renewable energy. By 2030, BP intends to cut its oil production by 40% and refocus its investments away from oil exploration toward renewable power generation and services. The company will invest about $5 billion per year on renewables over the next ten years, and intends to develop 50 gigawatts (GW) of renewable generation capacity by 2030. By comparison, the world's current top renewable energy generator, NextEra Energy, only has about 24 GW of total renewable capacity (with another 14.4 GW of growth projects in its backlog).
Management believes this shift will support the company's newly reduced dividend. At BP's current share price, that dividend still yields about 5.5%. And speaking of share price, BP's looks undervalued right now. With all the oil majors posting negative net income in Q2 2020, we can't compare price to earnings, but BP's price-to-sales and price-to-cash from operations ratios compare favorably to those of its peers:
BP PS Ratio data by YCharts
With its dividend cut behind it, a low valuation, and a radical plan to improve performance, BP looks like a buy.
Are these stocks smart buys right now?
Not all "cheap" stocks are worth buying, and certainly there are some risks associated with these two stocks as well. In its current form, Dow is a young company, without an established track record of performance in different kinds of market environments.
For its part, BP cut its dividend in 2010 in the wake of the Deepwater Horizon oil spill in the Gulf of Mexico, and just slashed it again. Meanwhile, there's no guarantee that its new renewables-focused strategy will work out as planned.
In spite of that, both of these companies' current payouts look sustainable, and their share prices are cheap. They look like risks worth taking for dividend-focused investors.
