Stocks to buy

Equities have been going through a phase of uncertainty with a looming recession and aggressive contractionary monetary policies. The failure of Silicon Valley Bank has further dented equity market sentiments. Of course, opportunities will continue to exist among growth stocks as valuations look attractive. However, holding blue-chip stocks in the portfolio is important for capital preservation and regular cash inflow through dividends.

Fortunately, there are several attractive dividend stocks with a yield of 5% or more. My focus is on undervalued dividend stocks with a yield of 5% or more. Once market sentiments reverse, these stocks are poised for healthy total returns.

To screen undervalued dividend stocks, I have considered names that trade at a forward price-earnings ratio of less than 10. I believe that total returns on these dividend stocks can range from 20% to 30% in the next 12 months.

Ticker Company Price
MO Altria Group $46.87
RIO Rio Tinto $65.87
T AT&T $18.31

Altria Group (MO)

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Altria Group (NYSE:MO) stock is a quality dividend stock trading at a forward price-earnings ratio of 9.2 times. The stock offers a dividend yield of 8.0%, and dividends are sustainable.

Regarding positive business developments, Altria exited its stake in Juul Labs. This factor is discounted in the stock. Further, the company announced a definitive agreement to acquire NJOY Holdings. This will help accelerate the company’s business transformation towards non-combustible products.

However, the combustible segment will remain the cash flow driver in the coming years. For 2023, Altria has guided EPS growth of 3% to 6%. I expect cash flows to remain robust. This will support dividends and share purchases.

Overall, Altria’s worst seems to be over with the Juul exit. The focus will be on increasing market share in the non-combustible segment. Considering the company’s financial flexibility, further acquisitions seem likely in this segment.

Rio Tinto (RIO)

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Rio Tinto (NYSE:RIO) is another quality name among dividend stocks with a yield of 5% or more. RIO stock trades at a forward price-earnings ratio of 9 times and offers investors a dividend yield of 7.2%.

It’s worth noting that even amidst economic concerns, RIO stock has trended higher by 20% in the last six months. I expect the uptrend to sustain, considering attractive valuations and the prospects of renewed expansionary policy in the second half of 2023.

For 2022, Rio Tinto reported a free cash flow of $9 billion. Clearly, the business is a cash flow machine, and the balance sheet is investment grade. The iron ore segment remains the key cash flow driver. However, Rio is diversified, with a presence in aluminum, copper, and other minerals. The company focuses on metals likely to benefit from the push toward green energy.

Another point worth mentioning is that Rio expects to invest $25 billion from 2023 to 2025. These investments will translate into cash flow upside and potential dividend growth.

AT&T (T)

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AT&T (NYSE:T) stock has been largely sideways in the last 12 months. Because T stock trades at a forward price-earnings ratio of 7.5 times, a breakout on the upside seems imminent. The stock offers an attractive dividend yield of 6.0%.

From the perspective of stock upside, AT&T is a deleveraging story. Last year, the company reduced its net debt by $24 billion. If reports are to be believed, the company is planning to sell its cybersecurity division. Deleveraging will therefore continue in 2023, and as credit metrics improve, T stock is likely to trend higher.

It’s also worth noting that AT&T has reported sustained growth in post-paid phone and fiber subscribers. The company has made significant investments in boosting its 5G network in the last few years. It’s likely that subscriber growth will sustain along with improvement in average revenue per user. Unsurprisingly, the company has guided for a free cash flow of $16 billion or higher in 2023 compared to $14 billion in 2022.

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.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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