The markets are currently acting anxiously. Small and mid-sized Tech stocks in particular, which have soared in recent years, have lost considerable ground. High inflation and the ever-closer interest rate turnaround by the Federal Reserve are driving investors out of risky growth stocks.
While we are still far from a crash, it is becoming clear how unsafe bets on individual sectors (such as tech) can be. Sadly, private investors are often the last to arrive at the party and are now paying dearly. According to a report by J.P. Morgan, the average investor achieved a poor 2.9 percent performance over the last 20 years, which is only slightly above the long-term inflation rate and significantly below the current inflation level.
Given the far better long-term performance of diversified asset classes, a balanced portfolio is the better choice for investors. Such a portfolio should not be without dividend stocks. That’s why we want to revive an old series of articles and show you monthly dividend stocks where the current dividend yield is higher than the average of the last 12 months. But we not only show you the top 15 stocks, we also put a few of them under the microscope to check for you whether they are a bargain or whether you should rather keep your hands off them despite the discount.
The selection of dividend stocks at a discount is based on the Dividend Turbo algorithm, which continuously compares the current dividend yield with the historical dividend yield for hundreds of the world’s most popular dividend stocks. Since a yield below 2 percent is uninteresting for many dividend investors, the selection only considers stocks with a dividend yield of at least 2 percent. In addition, only reliable dividend payers are to be shortlisted, which we measure based on a dividend stability ratio of at least 0. This ratio measures the reliability of the dividend and ranges from -1 (consistently lower dividend every year) to +1 (consistently higher dividend every year). Furthermore, we only considered stocks with a dividend history of at least five years without cuts. The table below shows the top 15 stocks whose dividend yields meet these criteria. The delta column on the right shows you how many percent the current dividend yield is above the historical average.
|ISIN||Name||Div.%||Stability||Δ Div. 12 months|
|CNE1000003X6||Ping An Insurance||4.45%||0.95||0.71%|
|US19239V3024||Cogent Communications Holdings||4.88%||1||0.69%|
|HK0823032773||Link Real Estate Investment Trust||4.59%||0.99||0.47%|
|US5246601075||Leggett & Platt||3.94%||0.99||0.41%|
The picture is in line with the general market situation. Despite minor corrections within the tech sector, many stocks continue to hover near their highs, so major discounts have been rare so far. Likewise, it is noticeable that the list does not have a sector-specific focus but covers various economic sectors, which makes the list all the more interesting.
In this article, we take a look at Ping An Insurance, Leggett & Platt, and Vonovia. All three stocks also promise considerable capital gains based on their fundamental valuation that comes in addition to a dividend discount. But are these stocks suitable investments? As always, we answer the following questions with the help of DividendStocks.Cash:
Does the company have a promising business model?
Is the dividend safe?
Is the stock overvalued or undervalued?
By the way: bevor diving into the fundamentals, you might want to check out your level of fundamental knowledge. I found this nice multiple choice quizz to test your financial skills 🙂.
With a dividend yield of 4.5 percent, the Chinese insurance, IT, and financial group Ping An Insurance offers the highest yield of the three companies examined here. In the past, the yield was below 3 percent for a long time. However, the general fuss about Chinese shares, Ping An Insurance’s involvement in real estate deals, and write-offs of stakes in highly indebted real estate companies in China have caused the insurance company’s share price to plunge by 50%.
Despite its disappointing performance, Ping An Insurance, with its wide-ranging services in insurance and banking, is an exciting company that stands out for its incorporation of technology and the formation of its ecosystems. With its approach centered on digitalization, its revenue has increased since 2010 from HKD 221 billion to an expected HKD 1.3 trillion in the recently ended year. Lately, however, the growth momentum has weakened somewhat. I see this less critically for the time being, especially given the current distortions in the Chinese real estate market. Low-growth years are also common for the European insurance giants. Furthermore, analysts expect sales to rise further in the medium term.
Conversely, however, significant risks remain. Even at Ping An Insurance, profit development is not a one-way street. In challenging economic times, shareholders always have to expect a drop in profits. This has been the case in recent years as well as during the financial crisis. In addition, it is still unclear to what extent Ping An Insurance is involved in the Chinese real estate market, which is currently difficult to navigate, and what write-downs are still lurking.
The overall profit trend shows that Ping An Insurance is on a growth path. Likewise, the forecasts are optimistic. However, with Chinese companies, predictions are always fraught with uncertainty due to potential regulatory intervention by the Chinese government. Caution is therefore advisable here.
Ping An Insurance has been paying a dividend since 2013 and has continuously increased it every year for the past six years.
The average dividend growth measured over the last five years has been a respectable 22.2 percent. Further increases in the double-digit percentage range are possible, at least because of the payout ratio of 40 percent of profits. Analysts expect Ping An Insurance to raise its dividend from the current HKD2.73 to HKD3.06, which is equivalent to a yield of more than 5 percent based on the current share price. However, according to Dividend Turbo, the dividend yield of Ping An Insurance shares is already above the various long-term corridors of the last few years, which fundamentally already indicates a favorable entry point.
With a current adjusted P/E ratio below 9, Ping An Insurance is trading far below its historical average of almost 15. It is interesting to note that the share has never been valued so low. Measured against the historical average and the expected earnings for 2023, the stock with a fair share price of around HKD 60 offers a mathematical catch-up potential of more than 240 percent(!). However, whether the share will close this gap in such a short time is uncertain, given the current market environment. However, the valuation shows that the market has already priced a lot of risk into the share price.
There are good arguments for buying Ping An Insurance stock from a fundamental perspective. The high dividend yield paired with a low payout ratio is a dream for dividend hunters. Nonetheless, keep one thing in mind: Ping An Insurance is currently sharing a risk that weighs on all Chinese stocks. Accordingly, investing in individual companies is unattractive to me when you can get the entire market and the diversification that comes with it at a similarly deep discount via an ETF. As tempting as the Ping An Insurance share therefore appears, I prefer to buy more shares of my Emerging Markets ETF.
With 51 straight years of dividend increases, Leggett & Platt is a true dividend aristocrat whose dividend yield is also above its historical average. The manufacturer of mattresses, foams, textiles, and specialty aerospace products is somewhat cyclical and has a market capitalization of USD 5.6 billion. The stock was trading very cheaply in the COVID-19 crash before it ignited a turbo rally of nearly 150 percent. Most recently, however, general price increases and supply bottlenecks have caused unrest among shareholders and depressed the share price.
When looking at Leggett & Platt’s share price performance, the assumption of substantial problems is obvious. However, despite the current dislocations in the supply chains, the negative effects are surprisingly relatively small. For example, the company has been able to pass on price increases from suppliers directly to customers. It is important to note that Leggett & Platt operates mainly in the B2B sector, selling its goods to commercial customers rather than end consumers. The company, therefore, appears to have some resilience and pricing power in the upstream markets, which is why analysts are optimistic about the forecasts for sales and margins.
Although the earnings development underlines the cyclical nature of the company, it points in the right direction in the long term. The share price is currently at the level of 2014, and even if the forecasts for the next few years were too optimistic, the share has probably already priced in a lot of this.
As a dividend aristocrat, Leggett & Platt stands for reliable dividends and last raised them by 5 percent in May 2021. The increase was even higher than the average of the last 5 and 10 years at about 4 percent each. However, the scope for further increases of this size is rather limited. Measured against free cash flow, the company most recently achieved a payout ratio of 102 percent. The payout ratio of 59 percent on profit looks better, though. So even if we don’t expect any huge increases in the next few years, the dividend yield of Leggett & Platt stock is still above the long-term corridors of the last few years.
Leggett & Platt offers a good entry opportunity from a fundamental perspective for long-term investors. With an adjusted P/E ratio of 15, the stock is favorably valued. Measured against historical multiples and expected adjusted earnings for 2024, the upside potential is nearly 50 percent, equating to an annual performance of more than 17 percent, including dividends.
Leggett & Platt stock is a buy for me at the current share price. Consequently, I increased my position by another 32 shares in December. Management is prudently navigating the company through the current uncertainties (see also the transcript of the last earnings call). Other reasons for my purchase were the fairly high dividend yield and the fundamental valuation.
Last but not least, we take a look at Vonovia. Following its successful acquisition of rival Deutsche Wohnen, the German real estate giant shines with a thoroughly interesting fundamental valuation in addition to its dividend discount. As with Ping An Insurance and Leggett & Platt, the Vonovia share is in a correction phase and is currently more than 20 percent away from its all-time high, primarily due to the general uncertainty surrounding possible regulation of housing groups in Germany. Fears of a potential turnaround in interest rates could also weigh on the share price, as higher interest rates make refinancing Vonovia’s capital-intensive business more expensive.
The takeover of Deutsche Wohnen will create Europe’s largest private housing group with around 550,000 apartments. Vonovia’s strength lies in providing housing-related services itself, such as caretaking, gardening, or maintenance, which other companies have outsourced. The efficient handling of a broader range of activities not only leads to savings compared with commissioning third-party companies but also to greater customer satisfaction (see also here and here on Vonovia’s value-add strategy). In addition, the company benefits from the sale of real estate, which has increased in value in the meantime. Analysts expect sales and funds from operations (FFO) to increase further in the coming years.
The positive FFO development is of particular interest to dividend hunters, as this income ultimately feeds the dividends.
From a purely legal perspective, Vonovia is not a REIT, which is why the company is free to determine the level of its distributions. Vonovia’s dividend policy foresees the distribution of 70 percent of its FFO to its shareholders. This solid figure leaves sufficient scope for reducing debt and further financing the business. Thanks to its good business performance, Vonovia has increased its dividends by an average of 10.8 percent over the past five years. For the past fiscal year, analysts expect an increase of around 7 percent, corresponding to a dividend yield of approximately 3.8 percent based on the current share price of around EUR 48. This puts the share significantly above the long-term corridors of several years.
From a fundamental perspective, the Vonovia share has reached an exciting level, as the share is currently trading at the historical average of the price/FFO ratio. In recent years, this line has always held, and the share price has risen as a result. In addition, the share is now trading below the pre-Corona level, even though FFO per share in 2021 was higher at EUR 2.42 than in 2019, where it was EUR 2.11.
Vonovia is a bet on further increases in real estate prices and rents in Germany and Europe. Even if the general real estate market were to weaken, Vonovia would be able to escape this trend to some extent by concentrating on particularly sought-after locations and cities and by selling or acquiring individual properties in response to changing market conditions. In addition, rental income is decoupled from general economic developments, at least in the short term. After all, even in bad economic times, people are the last to give up their homes. Vonovia is, therefore high on my re-buy list.
Using Leggett & Platt and Vonovia as examples, we have seen that a historically high dividend yield can undoubtedly serve as a buy signal. However, it is also essential to look at the business model, the current business situation, the security of the dividend as well as the valuation of the share based on earnings or cash flows. The Dividend Screener helps you answer all fundamental questions for over 1,500 stocks.
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