When I’m looking for dividend stocks to buy, I tend to focus on companies that look cheap compared to their potential.
This strategy might not be suitable for all investors. More often than not, when a stock looks cheap, there is a reason why.
Dividend stocks on offer
One of my favourite dividend Investments is British American Tobacco (LSE: BATS). This embarrassingly-cheap dividend stock currently offers a dividend yield of 7.9%. It also trades at a discounted price-to-earnings (P/E) multiple of 8.3.
It’s clear why the market hasn’t rewarded the company with a higher multiple, and that’s because of the group’s exposure to tobacco.
Cigarette consumption worldwide is declining on a per capita basis, which means sooner or later British American’ customer numbers could dwindle significantly.
This risk aside, the company’s been a dividend champion for years. Profits have increased steadily over the past five years, rising at a compound annual rate of 8.3%.
Analysts expect this trend to continue as the company increases sales of reduced-risk products and increases prices across its product portfolio. And as long as the direction of increasing profits continues, I’d like to own the stock in my portfolio.
Complex balance sheet
Another company that features my list of embarrassingly-cheap dividend stocks is Phoenix (LSE: PHNX). There’s nothing wrong with this group per se, but it’s one that isn’t easy to understand.
The firm specialises in the acquisition and management of closed life insurance and pension funds. It rolls up acquired funds and uses its scale to achieve operating synergies. These synergies increase cash generation, which it can then return to shareholders.
The enterprise can be challenging to understand because it has a complex balance sheet full of different assets and derivatives. What’s more, as the company is trying to manage assets today that will be paid out in the future, it’s highly susceptible to even small changes in interest rates. These could throw off the group’s calculations and cause financial problems.
However, I’m willing to invest in the business because I understand how it operates. That’s why I’d snap up the shares and their 7% dividend yield today while they’re trading at a discounted P/E of 8.4.
Finally, I’d buy discounted Russian steel producer Evraz (LSE: EVR) from my portfolio of dividend stocks. I don’t really have to explain why investors have been avoiding this business. Russia has always been a volatile place to invest, and it’s only really suitable for the most risk-tolerant investors. If the state suddenly decides it doesn’t like Evraz, the company’s fortunes could change virtually overnight.
That said, shareholders are rewarded for taking on the risk. The stock currently supports a dividend yield of 12.5%. The company is presently benefiting significantly from increased demand for steel and other construction products. Based on current earnings projections, the shares are dealing at a forward P/E of just 5.8.
Looking at these figures, I’d buy Evraz for my portfolio of dividend stocks today despite the risks of investing in the company. I think its cheap valuation and high level of income offset the risks involved.