Finding high-yielding stocks that trade with a low price-earnings ratio can be difficult to do when the average yield for the S&P 500 is 1.7% and the average price-earnings ratio is above 29.
Fortunately, there are some names out there that pay a dividend yield of at least 4% and trade with a low earnings multiple. We will look at three such companies, all of which recently announced dividend increases.
Northrim BanCorp
Northrim BanCorp Inc. (NRIM, Financial) is a bank holding company for Northrim Bank in Alaska. The company has two segments: Community Banking and Home Mortgage Lending. The company provides checking and savings accounts, money market deposit accounts and certificates of deposits. Northrim also provides commercial, construction and automobile loans. The company operates 16 branches in Alaska. Northrim has a market capitalization of $185 million and generated almost $64 million of revenue over the past four quarters.
Northrim raised its dividend by almost 3% for the upcoming Sept. 18 payment. The ex-dividend date is Sept. 9. This is the second increase this year. The dividend growth streak now stands at 11 years. According to the Dividend Investing Resource Center, Northrim has raised its dividend by an average of 12.5% per year over the past five years.
Investors should receive $1.38 of dividends per share in 2020. According to Yahoo Finance, the analysts covering the stock expect that the company will earn $3.91 per share this year. The payout ratio is just 35%, which is nearly in line with the average payout ratio of 36% that the stock has had since 2015.
Shares yield 4.8% based on Friday's closing price of $28.98. This is 180 basis points higher than Northrim's five-year average yield of 3%.
Northrim has a forward price-earnings ratio of 7.4 based off of the last price and expected earnings per share for the year. This compares very favorably to the stock's five-year average price-earnings ratio of 12.6.
Northrim is a rather small bank and is entirely based in Alaska. The most recent raise is well below the average, but the current yield is superior to what shareholders are accustomed to seeing. The stock also has a single-digit earnings multiple that could be attractive to value investors. Those seeking to diversify their regional bank positions may find Northrim a solid investment.
Toronto-Dominion Bank
Toronto-Dominion Bank (TD, Financial) is the second-largest bank in Canada. The company can trace its roots back to the mid-1850s, but has developed into more of a global bank over time. The company has more than 26 million customers, is valued at nearly $90 billion and produced revenue of more than $29 billion over the last year.
Toronto-Dominion raised its dividend by 3.5% for U.S. investors for the Oct. 31 payment. Investors must own the stock prior to Oct. 8 in order to receive the dividend. This most recent raise gives the bank nine connective years of dividend growth in Canadian currency. U.S. investors have received an average annual dividend increase of 6.2% over the last five years.
U.S. shareholders will have received $2.32 of dividend per share this year. Analysts expect that Toronto-Dominion will earn $4.78, which would result in a payout ratio of 49%. This is above the five-year average payout ratio of 44%, but still in a safe zone.
The stock offers a dividend yield of 4.8% based off of the most recent closing price of $48.57. This is more than a full percentage point better than the stock's five-year average yield of 3.7%.
Using Friday's closing price, Toronto-Dominion has a forward price-earnings ratio of 10.2. Shares of Toronto-Dominion have an average multiple of 12.1 times earnings since 2015, so the stock remains undervalued. I have reviewed all of the Canadian banks recently and Toronto-Dominion trades with the highest discount to average earnings multiple among the bank's peer group.
Toronto-Dominion is one of the largest financial institutions in Canada. Unlike its peers in the U.S., the bank did not reduce its dividend during the 2007 to 2009 financial crisis. This is a sign that the bank is more conservatively run, which should bode well for future recessions. The stock offers a yield that is significantly higher than its five-year average and the valuation remains quite low relative to its historical average. Between the high yield and valuation, I believe that Toronto-Dominion can be bought at the current price by those looking for exposure to the financial sector.
Verizon Communications
Verizon Communications (VZ, Financial) is one of the largest telecommunication companies in the world. The company's network covers nearly 300 million people in the U.S. and services more than 98 million customers. Verizon had sales of almost $130 billion over the last year and is presently valued at $250 billion.
Shareholders received a 2% dividend raise for the Nov. 2 payment date. The ex-dividend date is Oct. 8. Verizon has now increased its dividend payment for 16 years in a row. The low raise is very typical of the telecom giant as the average increase over the last half decade is just 2.5%.
Investors will receive $2.47 of dividends in 2020 for every share of the company that they own. Verizon is expected to earn $4.77 by analysts in 2020, giving the stock a projected payout ratio of 52%. This is down from the five-year average payout ratio of 55%.
Shares of Verizon closed at $60.48 on Friday, which gives the stock a yield of 4.1%. This is lower than the average dividend yield of 4.5% that the stock has offered since 2015.
Using the most recent closing price and expected earnings per share, Verizon has a forward price-earnings ratio of 12.7. This is slightly higher than the five-year average price-earnings ratio of 12.2 that the stock has traded with since 2015.
Verizon had an envious leadership position in a sector with just a few large players. The company's yield helps to offset low dividend growth and the manageable payout ratio means that future dividend raises are very likely. The valuation is a bit rich relative to the historical average, but still very low overall. Given this, I believe that Verizon can be bought today.
Final thoughts
High-yield stocks with low valuations do exist in this market. Northrim, Toronto-Dominion and Verizon are all examples of such stocks.
Each company also recently gave a dividend increase. While the most recent increase is below their respective averages, the payout ratio for each is either below or very close to the five-year average payout ratio. Each dividend also appears to be safe.
Northrim and Toronto-Dominion trade at a discount to the five-year average price-earnings ratio, while Verizon is just above its average.
Investors looking for a combination of income and value should consider Northrim, Toronto-Dominion or Verizon for purchase.
Disclosure: The author has a long position in Verizon Communications.
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