3 Dirt Cheap Dividend Stocks to Buy Hand Over Fist

Equity markets have had no shortage of worries in recent months. High inflation, slowing economic growth, future interest rate hikes, and geopolitical turmoil are among the most prominent concerns. This is why the S&P 500 index has plunged 23% year to date. 

However, many stocks have fared better so far this year. Here are three that have drastically outperformed the market and appear to offer attractive combinations of value and growing income.

Image source: Getty Images.

1. Bristol-Myers Squibb

Pharma stock Bristol-Myers Squibb (NYSE: BMY) has rallied 19% this year. Even with this impressive performance, the shares look like a bargain. This is because Bristol-Myers’ forward price-to-earnings (P/E) ratio of 9.8 is significantly lower than the pharmaceutical industry average of 13.5. And the stock’s price-to-sales ratio of 3.5 is moderately below the 10-year median of 4.2. 

The concern is that Bristol-Myers will face patent expirations in the years to come on its three top-selling drugs, which comprised some 68% of its $11.6 billion in first-quarter revenue. These include the cancer drugs Revlimid and Opdivo, as well as the anticoagulant co-owned with Pfizer called Eliquis. 

The good news is that Bristol-Myers has more than 50 compounds at different stages of development. Analysts expect this will more than offset looming patent expirations, which is why it’s projected that Bristol-Myers will generate 4.6% annual earnings growth over the next five years.

And with the dividend payout ratio set at around 29% in 2022, the stock can grow its dividend a bit ahead of earnings for the foreseeable future. A high-single-digit annual dividend growth rate paired with Bristol-Myers’ 2.9% dividend yield makes it an excellent pick for investors seeking a blend between current and future income.

2. British American Tobacco

Cigarette maker British American Tobacco (NYSE: BTI) has gained 10% year to date. Yet the stock is still trading at a forward P/E ratio of just 9.2. For context, this is far under the tobacco industry average of 13.9. 

And don’t let that low valuation fool you: The stock doesn’t appear to be a value trap. That’s because of the company’s exceptionally strong fundamentals. Thanks to a growing share of revenue from its noncombustible products, analysts are predicting 8.9% annual earnings growth over the next five years. This is higher than the tobacco industry average growth prediction of 5.5%.

British American Tobacco’s market-crushing 7.1% dividend yield is more than four times the S&P 500 index’s 1.7%. And the stock’s dividend payout ratio will be around 65% in 2022, which makes the dividend quite safe for income investors. 

3. FedEx

Mail delivery giant FedEx (NYSE: FDX) has dipped 11% thus far in 2022. FedEx’s forward P/E ratio of 10.3 is slightly higher than the integrated freight and logistics industry average of 9.6. But the stock has arguably earned this premium with its strong performance over the years. 

In its most recent fiscal year ended in March, the stock’s dividend payout ratio stood at less than 15%. This positioned FedEx to reward shareholders with a massive 53.3% hike in its quarterly dividend per share to $1.15 earlier this month.

The stock’s decline this year and payout raise has pushed its dividend yield up to 2%. Along with its double-digit annual dividend growth potential, this makes FedEx a nice mix of yield and growth. 

Analysts are forecasting that the stock will deliver 12.4% annual earnings growth over the next five years. This will be made possible by global e-commerce spending growing from $4.9 trillion in 2021 to $7.4 trillion by 2025. The prominent outlook for global e-commerce spending should translate into higher package volumes and revenue for FedEx, which is what gives the company a bright future.

Kody Kester has positions in Bristol Myers Squibb, British American Tobacco, FedEx, and Pfizer. The Motley Fool has positions in and recommends Bristol Myers Squibb and FedEx. The Motley Fool recommends British American Tobacco and recommends the following options: long January 2024 $40 calls on British American Tobacco and short January 2024 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.

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