The personal savings rate in the United States was 3.2% for March. Compared to the long-term average of 8.47%, the savings rate is significantly low. Inculcating the idea of saving for retirement and other personal needs is critical to ensure smooth finances through the ups and downs. An important part of retirement saving is to consider exposure to high-yield dividend stocks.
There are two key benefits. First, high-yield dividend stocks are generally blue-chip ideas that represent companies with strong fundamentals and cash flows. Holding these stocks for the long term is a source of regular cash flows in the form of dividends. Further, if the high-yield dividend stock is undervalued, there is room for significant capital gains over the long term.
The focus of this column is on three stocks that have a dividend yield of over 8%. Further, these blue-chip stocks trade at a valuation gap. I see limited downside for these ideas from current levels, while the upside potential is significant.
Vale (VALE)
Vale (NYSE:VALE) is an attractive name to consider among high-yield dividend stocks for multiple reasons. The obvious factor is that VALE stock offers a dividend yield of 9.6% and dividends are sustainable considering the cash flow potential.
Further, VALE stock has been a massive underperformer, with total capital gains of 1.3% in the last five years. At a forward P/E of 5.8, the stock is trading at a deep valuation gap. Even if the industrial commodity price environment remains volatile, VALE stock has limited downside from current levels. On the other hand, the upside potential is significant.
A third reason is that iron ore is trending higher, and with potential rate cuts impending, it’s likely that commodities will rally. For Q1 2024, Vale reported its highest quarterly iron ore production since 2019. Copper and nickel production was also robust. Investment in assets that support global energy transition will likely reap long-term rewards.
Altria (MO)
Altria (NYSE:MO) stock is another undervalued name to consider among blue-chip stocks. Besides trading at an attractive forward P/E of 9, MO stock offers a dividend yield of 8.62%. While revenue growth has remained muted, Altria has continued to generate robust cash flows. That will ensure dividends are maintained at current levels.
An important point to note is that Altria is in a phase of business transformation. The focus is on driving sales in the non-smokable segment. However, the transformation will likely be gradual, and the smokable business remains the cash flow machine.
Having said that, there are positive business developments in the non-smokable category. As an example, the company’s NJOY device retail share has continued to increase. Similarly, the company’s oral tobacco shipment volume has remained on an uptrend.
It’s also worth noting that Altria retired $1.1 billion of notes that came due in Q1 2024. With healthy cash flows, deleveraging will ensure continued improvement in credit metrics.
Aker BP ASA (AKRBF)
Aker BP ASA (OTCMKTS:AKRBF) has remained under the radar, as the stock trades in the OTC exchange. However, there is no doubt about the long-term growth potential for this oil & gas exploration company. Besides trading at attractive valuations, AKRBF stock offers a robust dividend yield of 9.96%.
As an overview, the company has high-quality oil & gas assets in the Norwegian Continental Shelf. As of 2023, Aker reported 2P reserves of 1.72 billion barrels of oil equivalent. Further, Aker has 2C resources of 810 million barrels of oil equivalent.
Besides a strong reserve base, Aker has an attractive oil price break-even. The full portfolio break-even is estimated at $35 to $40 per barrel. Therefore, even if oil trades at $80 per barrel, Aker BP is positioned to deliver robust free cash flows.
It’s worth noting that the company has grown in the past through multiple mergers & acquisitions. With a robust liquidity buffer of $6.6 billion and a low leverage ratio of 0.2, Aker is positioned for aggressive organic and acquisition-driven growth.
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.
