There's a good reason that investors love high yielding dividend stocks. Not only does a dividend help buffer against downside risk, it also provides a steady base of returns over time that compounded, can add up to higher growth than you might expect.
Usually investors think of dividend paying stocks as large behemoths that simply don't have the ability to grow like it's smaller, younger competitors. It's a myth that's led many investors away from solid opportunities. These large entities might grow at a slower rate than you want, but when you factor in the dividends and the small downside risk these companies tend to have, you could find an investment that matches any high-risk small cap growth stock without having to expose yourself to unnecessary risk.
For a good example, all we need to do is look at Johnson & Johnson's (JNJ) stock.
Chart courtesy of StockCharts.com
If you bought 100 shares 10 years ago and reinvested all dividends, your holdings would have grown nearly 140%. And if you take a look at it's performance over that time, you'll see it's a very low-risk stock that was easily able to weather the 2008 financial crisis essentially making it a growth stock without the high growth risk.
A company with solid fundamentals and a dividend yield of more than 5%
Baxter International (BAX) is a $22 billion medical instruments and supplies manufacturer with operations in more than 100 countries. The company has two main business units: hospital products and renal.
The company recently beat earnings estimates reporting $1.00 per share versus $0.95 giving them their fourth straight earnings hit or beat in a row. An analyst at Barclays raised the price target on Baxter from $43 to $45 while maintaining an “overweight” rating on the stock and increased 2016 earnings estimates from $1.42 per share to $1.44.
Year-to-date, the stock hasn't done much of note – up just over 4%.
Chart courtesy of StockCharts.com
The stock's biggest move was a sharp tick higher after the company released 2nd quarter earnings results and then came down slightly once the stock was overbought. A quick look at its chart some a couple of strong bullish signals. First, the 50-day moving average just recently crossed over the 200 day moving average indicating building momentum. This momentum is further supported by the positive MACD figures pointing to a possible break higher.
The stock trades at an extremely cheap 9 times earnings compared to the medical supplies industry average of 33.8 making it a very undervalued company right now. Baxter also has a high gross profit margin of nearly 50% which also beats its competitors.
Of course, the biggest selling point for investors is the enormous dividend yield at just over 5%. Not only does this provide strong downside protection, but also amplifies gains in the stock. Even more impressive, the dividend payout ratio is only 41.70% giving the company plenty of room to keep paying out dividends or increase them down the road.
Factoring in the full year EPS for 2015 and assuming a fair P/E valuation, this stock should be worth about $45 – a 10% discount from its current price. Add in the annual $2.08 dividend as well and this stock is undervalued by about 15%.
Investors also have an X factor with Baxter by way of activist investor Daniel Loeb. His Third Point investment fund bought more Baxter shares recently bringing total ownership up to 10%. It could be the catalyst that send Baxter's stock much higher over the next several months.
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INO.com Contributor - Equities
Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.