Dividend stocks are one of the key components of a value investor's portfolio. The regular income provides increasing liquidity and compensation as you wait for the valuation thesis to play out. Typically, dividends tend to be a bonus as most value investing screens are run for valuation first. However, I also like to look at strong dividend stocks and then filter for undervaluation. These do not always offer strongest value stocks, but these will help protect your portfolio by including quality names that can weather a stock market downturn as I do expect to arrive anytime soon.

Screen Details

This screen looks for quality stocks that pay a great dividend and are reasonably undervalued. The quality is determined by several dividend policy attributes, such as dividend yield, historical dividend growth rate, and the sustainability of the dividend as evidenced by the dividend coverage. A Price/Earnings ratio check keeps the valuation to be reasonable.

  • Market capitalization > $30 million

  • Dividend yield in top 20% of the market

  • Dividend growth rate in top 40% of the market

  • Dividend coverage in top 60% of the market

  • P/E ratio < 15

  • Sector is Industrials or Materials

The screen was run using the Fidelity screener.

A great sustainable dividend yield, potential of dividend growth and good valuation allows you to buy and hold these stocks for a reasonably long term.

The Screen Results

Notes and Observations

  • AYR: Aircastle owns and leases aircraft and aircraft equipment to lessees in 44 countries. The business is capital intensive and the company carries significant debt. However, there is ample liquidity and the profit margins are high. The dividend yield is very attractive and can be acquired at a low multiple of earnings. Additionally, the stock can be purchased well under book value. I see the stock as attractive enough to add to VSG watchlist and investigate further.
  • CAT: A solid 3% dividend that is well supported by its earnings. The company recently hiked its dividend by 20% and has promised further dividend increases and share repurchases. Caterpillar is making a push in services business to dampen the cyclical nature of the business. The stock is attractively priced and the trade war is a concern in the short term. Adding to the watchlist.
  • CMI: Cummins makes engines and power systems. The stock is reasonably valued and yields a solid 2.64% in dividends. It can be a solid diversifier in a portfolio.
  • GBX: Greenbrier manufactures rail cars. It recently purchased the manufacturing unit of American Railcar Industries (Disclosure: We owned ARI until its sale). The company has a growing business but forecasts headwinds for the next year. The dividend is well supported and the stock is interestingly valued.
  • MAN: ManPowerGroup is a staffing company (quite amusing to see it classified in the Industrials sector). Fairly priced and good increasing dividend. At the historically high employment levels, the competition for talent is fierce; however, any economic slowdown or recession could be a risk to consider.
  • SNA: Snap-On manufactures professional tools. The stock is marginally underpriced with a good dividend. It can be a solid hold for an income investor, but if you are looking for great values, there may be better alternatives.
  • LYB: While the business itself may not be growing much recently, LyondellBasell's stock is well priced with attractive dividend yield. The chemical company is based out of London. The company currently has a tender offer to acquire 37 million of its shares between $77 and $88 per share. The tender offer expires on July 8. The stock is currently trading at $87.35, or close to the upper range of the tender offer. I find the stock attractive enough to add to the VSG watchlist, but will review it after the results of the buyback tender offer are out.

Ending Note

This screen resulted in three very different stocks that offer a good dividend yield and undervaluation. Further review is needed to ensure that the stocks satisfy my buying criteria.

With the markets sitting at very high valuations today, these stocks can offer a good hedge against any decline in the stock market. They will not be immune, but the dividend is well supported and the regular income will make riding out any downturn all the more easier.

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