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3 Best Dividend Stocks That Wall Street Is Sleeping On

The Motley Fool
The Motley Fool
 2022-01-21

Even with the S&P 500 down by more than 4% to start this year, it's difficult to make the case that the index is a bargain given its forward price-to-earnings ratio of 22.4. However, not all stocks in the index are priced at such a rich premium.

Here are three dividend-paying stocks that can provide investors with a rare trifecta of value , dividend growth potential, and quality. Let's take a closer look at these three stocks Wall Street appears to be sleeping on.

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1. Realty Income

Investors would be wise to consider buying shares of real estate investment trust (REIT) Realty Income (NYSE: O) before the market warms up to it. Its portfolio of nearly 11,000 triple net lease properties has allowed management to boost the REIT's monthly payout for 26 consecutive years, earning it a place on the prestigious list of Dividend Aristocrats .

A triple net lease contract requires the tenant to cover all expenses associated with the leased property (e.g., insurance, maintenance, and property taxes), and to cut a rent check to the landlord each month. Along with Realty Income's weighted average lease term of nearly nine years and its portfolio of quality properties, this business model has led to tremendous consistency in the company's operating results. Adjusted funds from operations (AFFO) per share have grown at an annualized rate of 5.1% over the past 25 years, and 2009 was the only year that AFFO per share fell.

Given Realty Income's expansion into continental Europe recently , the stock should continue to be able to generate annual AFFO per share growth in the mid-single-digit percentages for the foreseeable future. And with a dividend payout ratio that will be around 79% for 2021, management should be able to keep making healthy boosts to the dividend. Income investors can secure Realty Income's generous dividend -- which at current share prices yields 4.2% -- at a price-to-AFFO multiple of 18 based on the $3.91 midpoint of the company's guidance range for 2022 AFFO per share.

2. T. Rowe Price

Another stock that investors should think about purchasing before Wall Street regains its appreciation for it is asset manager T. Rowe Price (NASDAQ: TROW) , which is also a Dividend Aristocrat with 34 straight years of annual payout hikes under its belt. If investors are confident (as I am) that the long-term trend of gradually rising equity markets will continue, T. Rowe Price is one of the best plays out there. That's because the company boasted $1.69 trillion in assets under management (AUM) at the end of last year, which gives it significant size and scale. The company generates the vast majority of its revenue from investment advisory fees, which are based on the dollar value of the company's AUM.

Analysts appear to agree with the premise that equity markets will keep reaching new highs, powered by higher corporate earnings. This explains why the consensus estimate is that T. Rowe Price will deliver 12% annual non-GAAP (adjusted) diluted earnings per share (EPS) growth over the next five years. Those growth prospects are paired with an expected dividend payout ratio of 34% for 2021 (based on the average analyst estimate of $12.70 in adjusted diluted EPS). As such, management should have plenty of flexibility to further boost the dividend.

Investors today can scoop up T. Rowe Price's market-beating 2.5% dividend yield at a forward price-to-earnings ratio of 12.8, which is cheap for a stock of such high quality .

3. U.S. Bancorp

Regional bank U.S. Bancorp (NYSE: USB) is my final dividend-paying stock to contemplate buying before the market awards the stock with a higher valuation multiple.

The most recent U.S. inflation reading came in at 7%, which is the highest in nearly 40 years. In response, the Federal Reserve will almost certainly be raising benchmark interest rates several times this year. With $567 billion in assets, U.S. Bancorp will benefit from increased investment income in the quarters ahead. This explains why analysts are forecasting annualized earnings growth of 15% over the next five years. This expected earnings growth combined with U.S. Bancorp's anticipated payout ratio of 33.5% for 2021 should allow for solid dividend growth in the years ahead.

Considering that U.S. Bancorp is trading at a forward price-to-earnings ratio of 14.1, the stock -- with its market-topping 3% dividend yield -- appears to be an excellent option for both value and income investors.

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Kody Kester owns Realty Income and T. Rowe Price Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

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