In general, the biggest reason for holding dividend stocks is to generate regular cash flows. Furthermore, dividend stocks are typically low-beta stocks and help in balancing overall portfolio risk. However, that does not mean dividend stocks cannot produce healthy capital gains.
Over the past 10 years, the S&P 500 High Dividend Index has delivered an annualized price return of 6.95%. For the same period, the annualized total return is 8.86%. Clearly, price returns have been robust.
With the global markets facing uncertainty related to inflation and recession, there are several dividend stocks that have corrected and trade at attractive valuations. It’s just a matter of time before these quality blue-chip stocks fill the valuation gap. By doing so, they are likely to outperform.
With the four dividend stocks below, investors can position themselves for steady income and meaningful appreciation. And considering the revenue and earnings growth outlook of the underlying companies, these dividend stocks are worth holding for the long term.
Based on its low beta, robust 3.2% yield and undervaluation, Pfizer (NYSE:PFE) is among the top dividend stocks to buy. Over the past 12 months, PFE stock is up less than 1%. With a forward price-to-earnings ratio of just 7.8, there seems to be meaningful upside potential.
One reason for Pfizer’s lackluster performance is investor concern that revenue from Covid-19 vaccine sales is likely to decline. However, the company’s growth story is not tied solely to Covid-19. Pfizer has a deep pipeline of drugs. As new drug candidates are commercialized, they will boost sales.
Pfizer generated $29.9 billion in free cash flow for 2021. This has allowed the company to increase investments in research and development. At the same time, Pfizer has been active on the acquisition front in the past few quarters.
A breakout to the upside seems imminent for PFE stock. Investors can take the plunge for some quick capital gains in the next few months.
Next on my list of massively undervalued dividend stocks is AT&T (NYSE:T). With positive business developments and a forward P/E of 7, there is a strong case for 20% to 30% upside from current levels, in addition to the stock’s 6.2% forward annual yield.
AT&T has witnessed sustained growth in 5G and fiber subscribers. With some big investments in 5G, the company seems positioned to benefit. Currently, its 5G network covers more than 255 million people, and it plans to “double its fiber footprint to 30-plus million locations.”
AT&T has used the proceeds from its spinoff of WarnerMedia for deleveraging. Positive free cash flow provides flexibility for further deleveraging, as well as dividends, with management expecting FCF of $14 billion for the year.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) shares are up 11.5% in the past six months. However, given their forward P/E of 16.1 and 2.6% dividend yield, the stock looks undervalued.
Rising geopolitical tensions have made the defense sector attractive. Lockheed Martin is well positioned to generate profits with an order backlog of nearly $135 billion as of June 26. The backlog provides cash flow visibility for the next 12 to 24 months.
Additionally, I expect the order backlog to swell in the coming quarters. Many European countries have fallen short of their defense spending targets. With the escalation of tensions in the region, higher defense spending will benefit Lockheed Martin.
With solid free cash flow, Lockheed’s dividends are sustainable. The company reported $1 billion in free cash flows for Q2 2022, and management expects FCF of around $6 billion for the year.
Even after discounting Altria’s (NYSE:MO) troubles with e-cigarette maker JUUL, the stock seems undervalued. Shares are down around 6% in the past year and trading with a forward valuation of just 9.3x. Meanwhile, the stock throws off an impressive 8.1% yield.
Altria has increased its focus on the non-combustible business, where its investments will be focused over the next few years. However, the combustible segment remains the cash flow driver. For the second quarter, its Marlboro brand of cigarettes commanded 42.7% of the overall cigarette market.
It’s also worth noting that Altria has a 45% stake in Cronos (NASDAQ:CRON). The legalization of cannabis on the federal level would be a huge catalyst for CRON stock and benefit Altria.
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.