As a result of geopolitical tensions and stubborn inflation in the US, the risk of a pullback is accumulating, despite the fact that US stocks hit highs towards the end of March this year. Considering the Fed is going to cut interest rates sooner than later, it would clearly be wise for investors to add some undervalued dividend stocks to their portfolios while remaining cautiously optimistic.
The benefit of buying undervalued dividend stocks is that even if there is a correction in the broader market, there is limited downside for these stocks, especially some of the blue chips with lower risk factors. Moreover, if the market continues to be bullish, these stocks are likely to see a rebound in valuation repair. Meanwhile, companies that continue to pay dividends tend to be those with positive business growth catalysts, such as the three stocks below.
Vale (NYSE:VALE) may be the most undervalued dividend stock to buy in the industrial commodities sector. The stock trades at a forward price-to-earnings ratio of just 5.18 times, while offering a dividend yield of 14.28%. Considering the very attractive valuation, after a considerable period of sideways consolidation, the stock could be poised for an upside breakout.
Fundamentally, Vale has a diversified business, but iron ore remains a driver of revenue and cash flow. Iron ore prices have been trending upwards and demand from China remains strong. This sets the stage for a breakout rally in Vale’s share price. Secondly, the company recently announced its first quarter 2024 results, where it reported copper and nickel production growth in addition to strong iron ore production and sales figures, with first quarter adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) and free cash flow of $3.5bn and $2bn, respectively. Strong quarterly results offer the potential for a valuation repair.
Chevron Chevron (NYSE:CVX) is one of the most undervalued oil and gas stocks to buy. Chevron shares have been trading sideways over the past 12 months. However, the stock has returned 11% year-to-date thanks to relatively high oil prices and strong quarterly results. This positive momentum is expected to continue.
Considering that geopolitical tensions are expected to further support oil prices, along with the expectation of a rate cut in 2024 is also positive for sectors such as energy and industrial commodities. As oil prices strengthen, energy producers will continue to see earnings and share prices rise. It’s worth pointing out that Chevron has high-quality assets, and in the first quarter of 2024, the company reported $6.8 billion in operating cash flow. Assuming higher oil prices, the company is on track to exceed $30 billion in operating cash flow for the full year. This provides ample flexibility to aggressively invest in exploration and dividend growth. Chevron stock currently offers a 3.93% dividend yield.
The price of gold has been trending higher this year, supported by geopolitical tensions, central banks buying the precious metal, and expectations of interest rate cuts. And most investment banks and analysts believe that the precious metal’s upward trend is likely to remain positive. Therefore, it remains a good time to pick up undervalued gold mining stocks for healthy returns.
Shares of Barrick Gold (NYSE:GOLD) are still down 12% compared to a year ago, and currently trade at an attractive forward P/E of 16.98x and a dividend yield of 2.34%.
Barrick recently reported first-quarter results with gold production of 940,000 ounces, which was lower than in the fourth quarter of 2023, thus dragging down the stock price. However, production was lower due to planned maintenance at Nevada Gold Mines and sequencing of mines at different sites. As production increases in the coming quarters, the company’s share price will return to an uptrend. Additionally, Barrick’s EBITDA margin is likely to expand further as gold continues to trade above $2,300 per ounce. As cash flow swells, Barrick will be in a position to increase its dividend.
