The S&P 500 index had touched highs of $5,275 towards the end of March. However, there has been some correction in the markets driven by geopolitical tensions coupled with stubborn inflation in the United States. While I remain positive about the market outlook for 2024, I am cautiously optimistic because rate cuts might be delayed. I, therefore, believe it’s a good time to increase exposure to undervalued dividend stocks.
The benefit of pursuing undervalued dividend stocks is that the downside is likely to be capped even if the markets correct. Since the focus is on blue-chip stocks, the ideas discussed have a low beta. Further, if markets remain bullish, I expect these stocks to trend higher on the back of a valuation gap. At the same time, the undervalued dividend stocks represent companies with positive business growth catalysts. The stock is, therefore, likely to discount good quarterly numbers.
Let’s discuss the reasons to be bullish on these undervalued stocks.
Chevron (CVX)
Chevron (NYSE:CVX) is among the most undervalued oil and gas stocks to buy. In the last 12 months, CVX stock has remained sideways. However, year-to-date returns have been 11% on the back of relatively higher oil prices and strong quarterly numbers. I expect the positive momentum for the stock to sustain.
I am bullish on oil prices due to two factors. First, geopolitical tensions imply that oil will trade at a premium. Further, the expectation of rate cuts in 2024 is positive for sectors like energy and industrial commodities. Therefore, as oil trends higher, I expect positive momentum for CVX stock.
I must add that Chevron has quality assets at a low break-even. For Q1 2024, Chevron reported operating cash flow of $6.8 billion. Assuming oil trends higher, the company is positioned for OCF of more than $30 billion. That provides ample flexibility for aggressive investments toward exploration and dividend growth. Currently, CVX stock offers a dividend yield of 3.93%.
Vale (VALE)
Vale (NYSE:VALE) is possibly the most undervalued dividend stock to buy from the industrial commodity segment. The stock trades at a forward price-earnings ratio of 5.18 and offers a dividend yield of 14.28%. Given the valuation, a breakout on the upside is likely because the stock has remained sideways for an extended period.
An important point to note is that Vale has diversified operations. However, the iron ore business remains the revenue and cash flow driver. Iron ore prices have been trending higher, with demand from China increasing on a relative basis. This factor underscores my view that VALE is poised for a breakout rally.
It’s also worth noting that Vale recently reported Q1 2024 numbers. Iron ore production and sales data were robust. Additionally, the company also reported higher copper and nickel production. VALE’s fundamentals remain strong, with adjusted EBITDA and free cash flow for the quarter at $3.5 billion and $2 billion respectively. Strong quarterly numbers are another reason to expect a healthy rally from the current valuation gap.
Barrick Gold (GOLD)
Gold has trended higher for year-to-date backed by factors of geopolitical tensions, central banks buying the precious metal, and expectations of rate cuts. I believe the trend for the precious metal will likely remain positive. It’s, therefore, a good time to pick undervalued gold miners for healthy returns.
Barrick Gold (NYSE:GOLD) has declined by 12% in the last 12 months. GOLD stock looks attractive at a forward price-earnings ratio of 16.98 and offers a dividend yield of 2.34%. I see this as a good opportunity to accumulate for high total returns in the foreseeable future.
It’s worth noting that Barrick reported Q1 2024 gold production of 940 thousand ounces. Production was lower than in Q4 2023, and that depressed the stock.
However, the reason was “planned maintenance at Nevada Gold Mines and mine sequencing at various sites.” As production is ramped up in the coming quarters, the stock will trend higher. Further, with gold trading above $2,300 an ounce, EBITDA margin expansion is likely. As cash flows swell, Barrick will be positioned to increase dividends.
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.