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Church & Dwight Company(CHD-N)

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3 Incredibly Cheap Dividend Stocks

Motley Fool - Mon Oct 3, 2022

The stock market has been unkind to most investors in 2022, with the S&P 500 down more than 24% year to date. As a result, many dividend-paying stocks are trading at a significant discount, and better yet, their dividend yields -- the ratio of a company's annual dividend to its share price -- have jumped to attractive levels.

With that in mind, here are three dividend stocks that look incredibly cheap at current valuations.

1. Church & Dwight

Homeowners are familiar with Church & Dwight(NYSE: CHD) products like Arm & Hammer or OxiClean, even if the parent company's name sounds unfamiliar. The household products company, a Dividend Aristocrat, has raised its dividend for 26 consecutive years. Additionally, Church & Dwight has paid a dividend for 46 consecutive years and pays $1.05 per share annually in dividends. The company's current dividend yield is 1.44% -- its highest since early 2020.

Church & Dwight stock was a superstar during the pandemic but is down roughly 28% year to date. As its share price has fallen from its all-time high in January, so has its price-to-earnings (P/E) ratio -- a common metric for valuing companies -- to roughly 23. For comparison, over the past five years, Church & Dwight's average P/E ratio is 26.5.

Like many other consumer goods companies, Church & Dwight is struggling with higher manufacturing costs and inflation. Still, management has announced price increases covering 80% of its global portfolio to combat the problem. Additionally, the company has higher-than-expected inventory levels, but management expects "inventory to get back in line by year-end."

Based on Church & Dwight's track record, the company will likely continue to raise its dividend each year and grow by acquisition. For example, the company acquired Zicam, a branded series for cold and allergy relief, in December 2020 for $530 million. According to management, Zicam is now the No. 1 brand in the "cold shortening" segment, with a 75% market share. So while Church & Dwight stock may not shoot to the moon like a tech stock, it's a steady performer in turbulent times that will pay you dividends along the way.

2. Home Depot

Home Depot (NYSE: HD), the largest home improvement retailer by market cap, has paid a dividend for 35 consecutive years. Currently, Home Depot pays a quarterly dividend of $1.90 per share, representing a 2.75% annual dividend yield. Yet its stock has struggled in 2022 -- down about 32% year to date.

Digging into Home Depot's current valuation, its P/E ratio is about 17 as of this writing. For reference, Home Depot's five-year P/E ratio average is 22.70.

One concern is that Home Depot's revenue is struggling to keep up with inflation. During Q2 2022, the company generated $43.8 billion in sales, which was 6.5% higher than Q2 2021.

However, that doesn't outpace inflation, which the Consumer Price Index most recently measured at 8.3% over the past 12 months. Additionally, overall transactions decreased roughly 3% in Q2 2022 compared to Q2 2021.

On the positive side, according to the 2020 United States Census, the average age of an American house is over 40 years old, meaning there should be plenty of home improvement projects on the horizon for most homeowners. Additionally, management recently reaffirmed its revenue and earnings guidance for the remainder of 2022.

Lastly, a key metric for any dividend stock is its payout ratio (annual dividend payments divided by annual earnings) to ensure the company can afford to maintain and potentially raise its payout. Generally, if a company has a payout ratio higher than 75%, there is a higher risk of cutting its dividend. Home Depot's payout ratio sits at roughly 43%, so the company should be able to continue its impressive dividend streak for years to come, even if it's facing short-term challenges.

3. Vail Resorts

With an impressive collection of 41 mountain resorts across four countries, Vail Resorts' (NYSE: MTN) offerings are unparalleled. However, its stock is down roughly 33% in 2022 and about 6% over the past five years. Still, beyond its highly coveted assets, there are reasons for optimism for this laggard stock.

First, the company is back to paying a quarterly dividend after suspending it during the pandemic. Vail Resorts currently pays a quarterly dividend of $1.91 per share, equating to an annual dividend yield of approximately 3.5%.

Investors may have some concerns about the company's long-term debt, which totals $1.6 billion on its balance sheet. But the mountain resort company reported $368 million in net income for its fiscal 2022 and guided for a net income range between $342 million and $411 million for its fiscal 2023. So with a dividend payout ratio of roughly 47%, investors should feel safe that the company will be able to maintain or grow its dividend in the future.

Vail's vulnerability to weather conditions is a long-term risk for the business. The company notes its Pacific Northwest mountain resorts recently experienced the lowest snowfall in over 30 years, and snowfall levels were well below average at its Colorado, Utah, and Lake Tahoe locations during recent holiday seasons. The company has mitigated some of those concerns by investing in snowmaking machines that "provide a more consistent experience, especially in the early season."

Despite some risks, Vail Resorts is well-positioned as the market leader in mountain resorts to continue delivering excellent experiences to its guests and outsized dividends to its shareholders.

Are these stocks buys?

Dividend stocks have historically outperformed the S&P 500, and in uncertain market conditions, they can provide certain ease when you see payments hit your portfolio each quarter. These three stocks in particular have established histories and should continue paying dividends for years to come, so they are worthy of consideration at significant discounts.

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Collin Brantmeyer has positions in Home Depot and Vail Resorts. The Motley Fool has positions in and recommends Home Depot and Vail Resorts. The Motley Fool has a disclosure policy.

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