Stocks with a high dividend yield are worth holding even for the most aggressive investor. In general, dividend stocks have a low beta and help in capital preservation. I would look at 30% to 50% portfolio exposure to these blue-chip dividend stocks. Further, considering undervalued stocks with 8%-plus dividend yield would sound attractive to any type of investor.
This column focuses on three fundamentally strong undervalued stocks with 8%-plus dividend yield. I believe that these stocks are worth holding for the long term. A potential rally from undervalued levels would imply high total returns in these stocks. I can say with some conviction that these undervalued stocks are likely to beat index returns consistently over the next few years.
It’s important to mention here that the valuation gap is on the back of near-term revenue growth or industry headwinds. However, this has no significant impact on overall business fundamentals. This is a separate issue from the Dividend Irrelevance Theory.
Let’s discuss the reasons to be positive on these undervalued high-yield stocks.
Altria Group (MO)
Altria Group (NYSE:MO) is another massively undervalued stock that offers a dividend yield of 8.89%. MO stock currently trades at a forward price-earnings ratio of 8.8 and I believe that total returns in the stock are likely to be robust.
In the last few years, Altria has been in a business transformation phase. The company is focused on the non-smoking product segment. However, it’s worth noting that the core smokable products business remains the cash cow.
In June, Altria completed the acquisition of NJOY Holdings for a consideration of $2.75 billion. The latter is a manufacturer of electronic cigarettes and vaping products. The company expects to execute its commercial plan for NJOY in the second half of the year. This is likely to have an impact on growth in 2024 and beyond.
It’s worth noting that the company’s share of oral tobacco business is already increasing in the United States. With positive business developments, MO stock is likely to trend higher after an extended period of consolidation. These undervalued stocks with 8%-plus dividend yield are sometimes better to consider other than dividend ETFs, which may have hidden costs.
Aker BP ASA (AKRBF)
Aker BP (OTCMKTS:AKRBF) is a hidden gem that trades at a significant valuation gap. I believe that the 9.88% dividend yield stock is likely to be a massive value creator in the next five years.
As an overview, Aker BP is an oil and gas exploration company with an asset focus on the Norwegian Continental Shelf. The company has a stake in prized assets like the Johan Sverdrup, which is a money spinner. Further, low break-even assets make Aker BP attractive even if oil trades in the range of $70 to $80 per barrel.
For Q2 2023, Aker reported a realized oil price of $75 per barrel. For the same period, the company reported operating cash flow of $2.9 billion. This would imply an annualized OCF of $12 billion. Of course, as oil trends higher, the company will be positioned for robust free cash flows. This will translate into higher dividends.
I must add that with a leverage ratio of 0.22, Aker BP has high financial flexibility. The company has a record of acquisition-driven production growth. I would not be surprised if there are more acquisitions in the coming years.
Ardmore Shipping (ASC)
Ardmore Shipping (NYSE:ASC) is another stock that offers a dividend yield of almost 8%. I am tempted to talk about ASC stock as it trades at an attractive forward price-earnings ratio of 4.6. Over the next 12 to 24 months, total returns are likely to be robust.
As an overview, Ardmore Shipping is a provider of product and chemical tankers with a global presence. The company continues to benefit from high-time charter equivalent rates. To put things into perspective, Ardmore reported a TCE rate of $27,450 for Q2 2023. The company however has a cash break-even of $14,000 per vessel per day.
The current TCE rate therefore provides headroom for robust cash flows. It’s also worth noting that Ardmore reported net leverage of 18% for Q2 2023. With high financial flexibility, dividends are secure and Ardmore can potentially pursue fleet expansion.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
