Stocks that pay dividends can be great for investors. After all, who doesn’t like to receive a regular payment from their investments? However, while attractive, investors need to be careful when they see a stock offering an exceptionally high dividend yield. Oftentimes, a high yield can be a sign of trouble at a company.
Management will use high yielding dividends to hold onto shareholders even as the company’s finances deteriorate, and the stock price declines. This is known as a “dividend trap.” Keep in mind that the average dividend yield among companies listed in the S&P 500 index is only 1.66%. Any yield above 3% is viewed as exceptional. Again, it is important for investors to be discerning when deciding whether a company can support its high dividend yield over the long-term. Here are the three most undervalued high-yield stocks to buy now.
Walgreens Boots Alliance (WBA)
Although it just got clobbered following its latest earnings print, there’s no denying that retail pharmacy chain Walgreens Boots Alliance (NYSE:WBA) is an undervalued, high-yield stock. Walgreens currently pays a quarterly dividend of 48 cents a share, which gives it a dividend yield of 6.76%. Following its latest earnings report and guidance, both of which missed Wall Street consensus forecasts, WBA stock is down 24% year to date and sitting at a 52-week low.
Long-term investors who want to buy low, eventually sell high, and then generate income while they wait for a stock to recover, should consider taking a position in WBA stock. Walgreens most recent earnings were hampered by a slowdown in consumer spending and declining sales of medications and treatments related to Covid-19. While the earnings print was disappointing, it was the first time the company has missed analysts’ consensus expectations in three years (since July 2020). Long-term, Walgreens should be fine.
Icahn Enterprises (IEP)
Down 47% on the year and a share price cut in half since May 1, there’s no question that Icahn Enterprises (NASDAQ:IEP) stock is undervalued. With a dividend yield of 29%, the highest among stocks in the S&P 500 index, it’s safe to say that IEP is a high-yield stock. The holding company’s investors clamor for the stock’s $2 a share quarterly payout. Investors who buy $10,000 worth of Icahn Enterprises stock today get themselves a quarterly dividend payout of $716. Not too shabby.
Of course, there is a “but” to all of this, which would be a critical report on Icahn Enterprises by infamous short seller Hindenburg Research. In May, Hindenburg accused Carl Icahn of operating a de facto Ponzi Scheme, by using new investor money to pay a dividend set at unsustainable levels. As one would expect, Carl Icahn has come out swinging at the Hindenburg report. But the damage appears to be done to the stock price as well as the reputation of Icahn Enterprises. Nevertheless, Carl Icahn has, so far, refused to lower the dividend payment.
Devon Energy (DVN)
U.S. oil company Devon Energy (NYSE:DVN) has cut its dividend payment twice this year, decisions that have angered shareholders. However, Devon still pays a quarterly dividend of $1.13 a share, which gives it a yield of nearly 10%. That’s about as generous a payout as investors are likely to find in a solid, well-run company. DVN stock also looks undervalued right now. As U.S. crude oil prices have fallen from a peak of $122 a barrel in June 2022 to under $70 today, Devon Energy’s share price has been dragged lower.
Year to date, DVN stock is down nearly 20%. The company’s price-earnings (P/E) ratio currently sits at 5, which is well below the average P/E ratio of 22 among companies listed on the S&P 500. Also, Devon Energy’s stock is now hovering near a 52-week low. This all makes for a good buying opportunity among investors who have the patience to stay with the energy producer until its share price recovers. While they wait, shareholders can enjoy one of the highest dividend yields around.
On the date of publication, Joel Baglole did not have (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.