Income investors are typically focused on dividends first and foremost. There is good reason for this — high-quality dividend growth stocks like the Dividend Aristocrats have often produced superior long-term returns with lower volatility than the S&P 500. Top dividend stocks have the ability to provide income to shareholders year after year, even during recessions.
But income investors should not overlook the concept of total return.
In addition to dividends, these stocks can provide returns to shareholders through a rising share price. The duo of capital gains and dividend income can be a powerful combination over time.
With this in mind, I believe the following three stocks are undervalued and possess long-term growth potential. They are expected to generate satisfactory total returns through a higher share price in addition to their reliable dividends.
So, if you’re interested in income stability combined with growth potential, consider these three names:
Dividend Stocks to Buy: Archer-Daniels-Midland (ADM)
Archer-Daniels-Midland is an agriculture stock with a market capitalization of nearly $27.8 billion. The company sources, transports, processes and distributes agricultural products. Its largest business is Corn Processing, where it converts corn into sweeteners, starches and bioproducts.
On top of that, ADM’s other segments do great business. For example, the Agricultural Services segment utilizes its extensive global grain elevator, transportation networks and port operations to buy, store, clean and transport commodities. ADM also operates an Oilseeds Processing segment that processes soybeans, sunflower seeds and more into vegetable oils and protein meals. Likewise, the Wild Flavors and Specialty Ingredients segment deals in flavors, colors, proteins and emulsifiers.
These are just some of the businesses that back ADM stock, which has a long history of growth. As a Dividend Aristocrat, the stock has increased its dividend for over 40 consecutive years. And it has continued to perform well in 2020. In ADM’s most recent quarter, adjusted earnings per share (EPS) increased about 16% year-over-year (YOY) due to strong underlying demand. Moreover, acquisitions will boost the company’s future growth, like its recent acquisition of the citrus flavor provider, Ziegler Group.
Finally, the company is recession-resistant thanks to its competitive advantage as a leader in the agricultural industry as well as its huge worldwide network. ADM has a 2.89% dividend yield, while the stock has a modest valuation. I believe the combination of a rising price-earnings multiple, future EPS growth, and dividends could lead to total returns in the high-single digits going forward. That makes ADM one of the more compelling dividend stocks out there.
Franklin Resources (BEN)
Next on my list of dividend stocks is Franklin Resources, a Dividend Aristocrat from the financial sector. The company is a global asset manager offering investment management and related services including sales, distribution and shareholder servicing. Assets under management (AUM) total about $1.4 trillion for the company, largely due to the recent acquisition of industry peer Legg Mason.
On top of that, Franklin continues to perform well. The company recently concluded its fiscal year. For the fourth quarter, operating revenue totaled a little over $1.7 billion. As for the year, Franklin Resources generated operating revenue of $5.57 billion compared to $5.67 billion in fiscal year 2019. Adjusted net income totaled $1.31 billion or $2.61 per share, a fractional decline from the prior year.
Finally, BEN stock is especially attractive because of its 4.85% dividend yield. Shares are also undervalued. The company is expected to generate earnings per share of $2.56 for the upcoming fiscal year, meaning the stock has a forward price-earnings ratio of 8.26. Over the past decade, however, shares have traded at an average of 12 to 13 times earnings. Therefore, using 10 times earnings as our beginning baseline is a reasonable fair-value estimate.
So, the combination of an expanding price-to-earnings multiple, 4.2% expected annual EPS growth and the nearly 5% dividend yield leads to total expected returns of 10% to 12% per year over the next five years.
General Dynamics (GD)
General Dynamics is a Dividend Aristocrat and a global giant in the defense industry. The company operates five business segments: Aerospace, Combat Systems, Marine Systems, Information Technology and Mission Systems. In addition, some of GD’s most important programs include the M1 Abrams tank, Stryker vehicle, Virginia-class submarine and more.
General Dynamics had revenue of nearly $40 billion last year. However, the company reported third-quarter results on Oct. 28. Total revenue declined 3.4% YOY, while diluted EPS declined 7.6%. These drops resulted from weakness in Aerospace, Information Technology and Mission Systems. But — while the backlog is decreasing — Aerospace’s is still nearly $12 billion, Information Technology’s is $8.9 billion and Mission System’s is about $4.8 billion. What’s more, revenue increased 4.5% for the company’s Combat Systems segment and 7.6% for Marine Systems YOY.
General Dynamics has a significant competitive advantage as a leader in the global defense industry. The company has entrenched contracts with the United States and militaries around the world. And with its platforms having decades-long life cycles, General Dynamics has the expertise and experience to perform sustainment and modernization.
Additionally, GD stock has increased its dividend for 29 consecutive years, making it a reliable pick of the dividend stocks. Continued dividend growth is also likely in the future, due to the company’s durable competitive advantages and market leadership. Currently, shares yield about 2.9%.
At the same time, shares in the stock appear to be undervalued. Based on expected full-year EPS of $11.08, the stock has a trailing price-earnings ratio of just below 14. The combination of expected 4% EPS growth, dividends and expansion of the price-earnings multiple lead to projected total returns of about 8% or more per year through 2025.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.