TGT - 7 Seriously Undervalued Dividend Stocks to Buy for High Total Returns

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From time to time markets present opportunities to buy undervalued dividend stocks.

When investors pick growth stocks, usually the objective is robust capital gains. On the other hand, defensive investors like dividend stocks. These stocks might not deliver healthy capital gains, but reward investors regularly with cash dividends. It ultimately boils down to the level of risk investors are willing to take.

These fundamentally strong stocks continue to reward investors with a robust dividend yield. Additionally, the valuation gap does not sustain for long in these stocks. As these undervalued dividend stocks trend higher, capital gains are handsome.

I would therefore not think twice before considering exposure to undervalued dividend stocks. Total returns are magnified with dividends and capital gains.

The global markets are going through a phase of uncertainty. Several high-quality dividend stocks have corrected in the last few quarters. It’s a good time to consider exposure to these stocks with a 12-to-24-month time horizon.

I believe that during this period, total returns from these undervalued dividend stocks will comfortably beat the index. Also, returns are likely to be positive when adjusted for real inflation.

Let’s talk about the reasons to be bullish on these undervalued dividend stocks.

Newmont Corporation (NEM)

After a big rally, it seems that the dollar is overbought and precious metals are oversold. Newmont Corporation (NYSE:NEM) is among the top undervalued dividend stocks to consider from the gold mining sector.

NEM stock has corrected by 44% in the last six months and seems poised for a reversal rally.

A big reason to like Newmont is its strong fundamentals. The company has an investment-grade balance sheet with a total liquidity buffer of $7.3 billion. Further, Newmont has 96 million ounces of gold reserves. With steady capital investments, the company aims to sustain stable production into the 2040s.

It’s also worth noting that Newmont aims to reduce the all-in-sustaining cost in the next few years. Even with sideways movement in gold, the company is positioned for EBITDA margin expansion.

Overall, with a strong balance sheet and robust cash flows, NEM stock is attractive after a deep correction.

JPMorgan Chase (JPM)

JPMorgan Chase (NYSE:JPM) stock has been in a downtrend in the last 12 months. At a forward price-earnings ratio of less than 10, the 3.8% dividend yield stock seems significantly undervalued.

Just to put things into perspective, 23 analysts have a median 12-month forward price forecast of $135. This would imply an upside potential of 25.3% from current levels. Considering the dividend yield, total returns over the next 12 months can potentially be 30%.

Considering the volatility in the markets, it’s likely that the bank’s investment banking and wealth management income will be impacted. However, this factor is discounted in the stock price.

The good news is that JPMorgan has a strong balance sheet. The bank is positioned to accelerate credit growth once inflation eases. As a matter of fact, JPMorgan reported 7% growth in average loans for Q2 2022.

Chevron Corporation (CVX)

Considering the cash flow potential, Chevron Corporation (NYSE:CVX) is another name among undervalued dividend stocks.

With the recent correction in oil, CVX stock has corrected from highs of $182 to current levels of $150. This seems like a good opportunity to accumulate the 3.95% dividend yield stock.

Even with global GDP growth concerns, OPEC believes that demand growth will sustain for oil in 2023. Further, with geo-political tensions, it seems unlikely that oil will trade below $80.

If oil is in the range of $80 to $100 per barrel, Chevron Corporation is likely to report annual operating cash flows of approximately $30 billion. With strong free cash flow visibility dividend growth and aggressive share repurchase will sustain.

Additionally, Chevron is targeting capital investment of $15 to $17 billion annually for the next few years. This seems likely through internal cash flows. The company will therefore maintain an investment-grade balance sheet. The correction in CVX stock, therefore, presents an attractive entry point.

Vale (VALE)

Vale (NYSE:VALE) is another deeply undervalued dividend gem. The stock trades at a forward price-earnings ratio of 3.8 and offers investors a dividend yield of 10.3%.

It’s worth noting that VALE stock has trended higher by 20% in the last month. This is an indication of a reversal in stock sentiment. Considering the valuation, I expect the upside to sustain.

Besides the valuation factor, a rebound in iron ore prices in China has supported the upside for the stock. If there are fears of a meaningful economic slowdown, stimulus is likely. It will ensure that the iron ore price remains in an uptrend.

Another point to note is that even with relatively lower prices, Vale reported EBITDA of $5.5 billion for Q2 2022. This implies an annualized EBITDA potential of $22.0 billion. Therefore, Vale is well positioned to deliver healthy free cash flows and dividends will sustain.

From a long-term perspective, Vale is focused on increasing nickel and copper production. An initial public offering for the base metal division is also likely. These catalysts are likely to take VALE stock higher.

Altria Group (MO)

At a forward price-earnings ratio of 8.4, Altria (NYSE:MO) stock is deeply undervalued.

Growth has been a concern and regulatory headwinds related to Juul have impacted MO stock. However, these factors seem to be discounted in the current valuation. I expect a meaningful reversal rally for this 9.3% dividend yield stock.

Altria’s business is at an interesting point with the company focusing on the non-combustible segment. The results have been encouraging with the company gaining market share in the oral tobacco segment. Having said that, the smoke-free business is unlikely to deliver free cash flows anytime soon.

It’s not a concern considering the fact that cigarettes continued to be the cash flow machine. Even with de-growth in revenue from the segment. With cash flows from the core business, dividends are sustainable. Additionally, Altria can make some big investments in the non-combustible segment.

Recent research indicates that smoking pot is more popular than cigarettes in America. Altria has 45% stake in Cronos (NASDAQ:CRON). Federal-level legalization of cannabis can be a potential value creator.

Lockheed Martin (LMT)

The defense sector has been in focus as geo-political tensions escalate globally. Lockheed Martin (NYSE:LMT) stock has trended higher by 16% in the last 12 months. However, the 3% dividend yield stock is still undervalued at a forward price-earnings ratio of 15.0.

Recently, Lockheed won a contract worth $6.0 billion from the Swiss government for F-35 fighter jets. The order inflow has remained robust in the last few months. As European countries increase defense spending, backlog growth is likely to remain strong. It’s a key reason to remain bullish on Lockheed.

It’s also worth noting that the company reported a backlog of $135 billion as of Q2 2022. For the current year, the company has guided for free cash flow of $6.0 billion. Considering the backlog and order intake, FCF is likely to remain strong in 2023 and beyond.

Lockheed also has a strong cash buffer to invest in future revenue projects. This includes hypersonics development. I expect cash flows to remain strong as new segments deliver revenue upside.

Target Corporation (TGT)

Target Corporation (NYSE:TGT) stock has witnessed a sharp correction of 35% for year-to-date 2022. Relatively muted growth and margin compression have affected the stock.

TGT stock looks undervalued at current levels of $151 and is poised for a reversal rally. The 2.85% dividend yield stock is therefore worth considering.

With the holiday season approaching, Target is looking to add 100,000 employees. I would expect the coming two quarters to be strong. This is one potential catalyst for stock upside.

From a long-term perspective, Target aims to invest $4.0 billion annually over the next few years. The investments will be targeted toward store remodeling, new stores and building an omnichannel presence. With retail consumption spending being one of the key GDP growth drivers, I am optimistic on the long-term trend.

Currently, 28 analysts have a 12-month forward median price target of $190 for TGT stock. It would imply an upside potential of 25% from current levels.

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.

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