The dividend yield of the S&P 500 Index is just over 1.4%. Many people are looking for ways to increase the cash flow of their portfolios. A common pitfall for income investors is buying “hot” names.
This emotion-driven approach is a result of the fear of missing out, leading to the expectation that a stock that has shown good growth will continue to rise. However, a more promising strategy is the contrarian approach, which is based on the idea that “out of favor” companies are often undervalued.
Another mistake in chasing returns is investing in high dividend stocks without proper analysis. Often, these shares turn out to be investor pitfalls.
In this article, we will discuss the factors that contribute to total return. We will also provide a step-by-step guide for selecting securities for your portfolio. Additionally, we will present a list of the best undervalued dividend stocks 2025, with annual payout yields of 4.5% and higher.
Table of Contents
Key Takeaways
- The total return of dividend stocks consists of three factors: dividends, changes in value, and growth in EPS. The latter can be achieved through an increase in net income or share repurchases.
- Certain screening criteria help identify undervalued dividend stocks and avoid value traps.
- An investment strategy should consider not only the high yield of upcoming dividends but also valuation metrics.
- Long-term investing allows for bargain shopping during bear markets. Fundamental analysis helps find fundamentally sound companies that have temporarily found themselves in an unfavorable position.
Step 1: Define Your Investment Objective
The first step to bargain shopping is defining your investment objective. These can be divided into two types:
- High-yield right now.
- Consistency and good dividend growth track records.
In the first case, the investor risks falling into a dividend trap. This term refers to shares that offer high yields for one of two reasons:
- a sharp decline in price;
- a one-time high payout.
In both cases, there is a risk of being left with a security that no longer provides the required yield, and a sale would result in a loss.
Investors who are interested in consistency focus not on current yield. The primary importance lies in the track record of shareholder distributions and key multiples, such as P/E and P/S. A decline in these metrics is one sign that a company is undervalued. In the long run, this provides a high total return. The investor will receive passive income and benefit from capital appreciation.
The investment objective also helps determine the selling strategy. For example, an individual may choose to sell securities if their yield has decreased or if the company is no longer considered undervalued.
Step 2: Set Your “Safety Net” Criteria
It is not enough to find a company that is undervalued based on the P/E multiple. It is essential to ensure that the investments will be relatively safe. For this purpose, additional screening tools are used. These are criteria that help identify fundamentally-sound companies.
In the selection process of securities, it is important to consider:
- Market cap. Large-cap companies provide relative stability, while mid-cap and small-cap companies are more volatile.
- Dividend payout history. This criterion is important when forming a portfolio that should generate stable passive income over a long period, such as a retirement account.
- Individual criteria that exclude securities that do not align with the investment strategy. For example, yield attractiveness or valuation metrics such as free cash flow, PEG Ratio, and others.
Step 3: Screen, Research, Narrow Down, and Repeat
Most likely, the next step after reviewing the screen results will be re-tweaking criteria. It may turn out that too many or too few shares meet the specified parameters. The optimal option is to obtain a list containing between 5 to 20 companies.
It is not enough to make a selection solely on the total return basis that a dividend stock may provide. The next step is to research and investigate securities that are being sold at a discounted price. It is important to understand what has caused the current valuation of the company and what prospects it has. This will allow you to add only fundamentally strong securities to your portfolio and help avoid investor traps.
It is also useful to pay attention to other companies that align with the chosen investment strategy, even if they are not undervalued today.
The result of the research should be a watchlist. The optimal number of positions is 5-10. Constantly monitoring securities will allow for advantageous purchases of selected assets during market corrections.
Key Characteristics of Undervalued Dividend Stocks
To select undervalued dividend growth stocks, it is essential to consider valuation metrics. First and foremost:
- Price-to-Earnings Ratio.
- Price-to-Book Ratio.
- Debt-to-Equity Ratio.
- PEG Ratio.
It is not enough to find dividend stocks with these multiples lower than the market average. A low price does not indicate growth potential. It is necessary to choose securities with these metrics below their historical averages.
This suggests that the company is perceived by the stock market worse than usual. In this case, there is a chance that the valuation will be revised over time. As a result, the stock prices will rise faster than the market average.
Another method for finding undervalued high dividend stocks is the “fair price” criterion. The greater the difference between this parameter and the current market price, the higher the potential profit from revaluation. However, there is no consensus on how to calculate the fair price. Different methodologies yield different values.
The investor’s task is to determine the reasons for the undervaluation of a security and its total return potential. The latter consists of the dividend yield and the annual valuation return from price appreciation.
An undervalued dividend stock does not necessarily start to appreciate immediately. Prices may continue to decline. Some companies remain undervalued for several years. Therefore, it is important to consider your investment horizon.
Examining Case Studies: 10 Undervalued Hidden Gem Dividend Stocks
Below are case studies presenting 10 hidden gems of the American market. These are undervalued securities from diverse sectors of the economy. The review does not include MLPs, BDCs, REITs, or foreign companies. These assets were excluded due to additional tax nuances associated with investing in them.
The top 10 high-yield dividend stocks listed here are based on expected returns. Each of these securities offers a dividend yield above 4.5%. In addition to regular dividends, the potential for price appreciation was also considered. The assessment is based on forecasts from leading Wall Street experts (according to stockanalysis.com).
Hidden Gem #10: Verizon Communications (VZ)
- Annual valuation return – 5,89%.
- Dividend yield – 6,79%.
- P/E – 17,29.
Verizon Communications is one of the largest wireless carriers in the U.S., generating about 75% of its revenue from this segment. The remaining portion comes from cable television and broadband access.
In the previous quarter, the company demonstrated revenue growth of 1.7% to $35.7 billion. Additionally, VZ reported an increase of 568,000 postpaid phone net additions. A strong point is its consistently low churn rate, which currently stands at 0.89%.
Verizon Communications has been increasing its dividends for 20 consecutive years, with a dividend yield that consistently exceeds the average of the S&P 500.
By the end of 2027, experts forecast EPS growth from $4.14 to $5.27, with an optimistic scenario reaching $5.57.
Hidden Gem #9: Pfizer Inc. (PFE)
- Annual valuation return – 22.49%.
- Dividend yield – 6,53%.
- P/E – 35,15.
Pfizer Inc. is an international pharmaceutical company that specializes in vaccines and prescription medications. It also holds a stake in the over-the-counter product manufacturer Haleon. Key products for PFE today include Eliquis, Ibrance, and Prevnar.
A strong competitive advantage for the company is its substantial resources, allowing it to conduct independent research and development (R&D). Significant contributions to expanding Pfizer’s product line also come from acquiring promising products. The introduction of new offerings helps offset the decline in demand for COVID-related medications.
Analysts forecast that PFE’s EPS will grow by 111.3% next year, primarily due to the company’s cost-cutting measures. Experts do not expect significant revenue growth.
Pfizer has been increasing its dividends for 16 consecutive years, with a continuous dividends history of 36 years.
Hidden Gem #8: Hooker Furnishings Company (HOFT)
- Annual valuation return – 72,71%.
- Dividend yield – 5,13 %.
- PEG Ratio – 0,85.
Hooker Furnishings is a manufacturer of leather furniture as well as casegoods made from wood and metal. Additionally, the company offers various home accessories and decor, such as lighting fixtures.
The current low valuation is attributed to two factors: housing market headwings and high interest rates. As a result, demand for HOFT’s products has declined, while debt servicing costs have increased. Experts at investing.com even warn that the company may face difficulties in paying interest.
In December 2024, HOFT reported losses. Since then, its market capitalization has decreased by more than 50%. Despite this, analysts expect to see a positive financial result in the company’s next report, especially if interest rates decline.
With a high potential for capital appreciation, this company could provide shareholders with a total return of over 75% in a year.
Hooker Furnishings has been paying dividends for 24 consecutive years, but it has only consistently increased the amount for the last 9 years.
Hidden Gem #7: Kraft Heinz Co. (KHC)
- Annual valuation return – 3,32%.
- Dividend yield – 5,17%.
- P/E – 27,90.
Kraft Heinz offers consumers processed food and beverages. The company sells sauces, cheeses, and refrigerated and frozen products. It also has a line of baby food.
In 2024, KHC faced a decline in organic sales and demand for its branded snacks. Additionally, there were issues with the Lunchables line. The company’s annual reports recorded a revenue drop of -2.98% and a profit decrease of -2.16%.
Despite this, experts provide a positive outlook. In 2025, earnings-per-share growth is expected to be 19.91%, with an optimistic scenario projecting a 27.8% increase. Kraft Heinz plans to address its challenges by ramping up advertising campaigns and refreshing the Lunchables brand.
The current P/E multiple is 20% below the average. KHC has been paying dividends for 12 years but has not increased them.
Hidden Gem #6: FMC Corp. (FMC)
- Annual valuation return – 23,64%.
- Dividend yield – 4,63%
- P/E – 4,11.
FMC Corporation is one of the leaders in agricultural sciences in the United States. The company offers fertilizers as well as crop protection and pest control products. FMC’s research and development efforts are in demand worldwide, including in Europe, Asia, the Middle East, and more. The products are sold through multiple channels, including its own retail network, partners, and independent distributors.
In the coming years, experts forecast an increase in demand for agricultural chemicals, particularly in emerging markets. Strong market positions allow FMC to enhance profitability through pricing gains. As a result, the company is expected to see an EPS increase of 29.9% for 2025 and 20.9% for 2026. In an optimistic scenario, the growth is projected to be 70.2% and 61.1%, respectively.
FMC has been paying dividends for 19 years but has not increased their amount in the last 3 years.
Hidden Gem #5: Western Union Company (WU)
- Annual valuation return – 13,12%.
- Dividend yield – 8,78%.
- P/E – 5,46.
Western Union is a giant in the money transfers industry. The company offers services for transferring money from one consumer to another and acts as an intermediary for bill payments. In 2024, there was an increase in Western Union’s branded digital transactions. Despite this, the company reported a revenue decrease of 3.38% for the year. However, effective management and cost-cutting measures contributed to an earnings per share increase of 63.10%.
For 2025, analysts forecast a significant decline in Western Union’s net income. Despite this, the current valuation of the company is considered below fair value. As of mid-March 2025, the P/E ratio for WU is only 5.46, while the historical average is 9.08.
The duration of payments to shareholders has been 19 years, but the amount of dividends has not increased since 2021. Despite this stability, Western Union offers an attractive dividend yield and is a leader in our list in this regard.
Hidden Gem #4: Wendy’s Co. (WEN)
- Annual valuation return – 19,51%.
- Dividend yield – 6,01%.
- P/E – 17,71.
Wendy’s is the second-largest hamburger quick-service restaurant in the United States, with approximately 10% of its locations situated in other countries.
The current P/E ratio stands at 17.71 compared to the historical average of 24.59. The reason for the low valuation by investors is the slowdown in growth rates. The company reported a decrease in system-wide sales growth, and same-restaurant sales remained virtually unchanged. For 2024, WEN was able to slightly increase revenue but experienced a decline in EPS.
Experts see potential for the company in new restaurant openings outside the United States. In an optimistic scenario, analysts expect EPS growth of 13.8% in 2025 and 30.6% in 2026.
The streak of continuous shareholder rewards for WEN has lasted for 22 years, but the amount of dividends has remained unchanged for the last 4 years.
Hidden Gem #3: Eversource Energy (ES)
- Annual valuation return – 8,10%.
- Dividend yield – 5,02%.
- P/E – 25,3.
Eversource Energy is a holding company with multiple subsidiaries engaged in regulated electric, gas, and water distribution. The infrastructure of Eversource is located in the northeastern United States, serving over 4 million customers.
In 2023, the company reported a net loss instead of a profit. Challenges also arose in the third quarter of 2024, stemming from the exit from offshore wind investments. This was partially offset by revenues from the electric transmission segment.
In the fourth quarter, the situation improved, and EPS exceeded forecasts. As a result, for 2024, Eversource was able to earn $2.27 per share. Analysts predict that in 2025, EPS growth will reach 115.5%.
This makes it one of the best undervalued stocks with dividends that are growing. The company has continuously paid dividends for 26 years, increasing the amount annually. In early 2025, Eversource was included in the Dividend Aristocrats index.
Hidden Gem #2: Carters Inc. (CRI)
- Annual valuation return – 19,69%.
- Dividend yield – 5,75%.
- P/E – 8,85.
Carter’s Inc. is the largest seller of children’s apparel in the United States and Canada. In addition to Carter’s, the company owns the brands OshKosh B’gosh and Skip Hop. The products are sold through its own retail stores and website, as well as major department stores.
Since 2022, the company has been showing unsatisfactory financial results. Its reports indicate a net sales decline and a decrease in EPS. The operating margin decrease is attributed to significant investments in business development and advertising campaigns.
According to experts at stockanalysis.com, there is a high likelihood that CRI’s financial performance will continue to decline in 2025. A turnaround is possible in the coming years, partly due to overall economic growth.
The current P/E ratio is nearly half of the historical average. This security is a leader among undervalued retail dividend stocks. The company is recommended for individuals with an investment horizon of several years. Carter’s Inc. has been paying dividends to shareholders for 12 consecutive years.
Hidden Gem #1: AES Corp. (AES)
- Annual valuation return – 39.21%.
- Dividend yield – 5,33%.
- P/E – 9,03.
AES Corporation is engaged in energy generation, with a key focus on the development of renewables. The company plans to achieve 12.7 GW from renewable sources by 2027. AES also owns power plants that operate on gas and coal. In addition to its activities in the United States, AES Corporation manages facilities in Latin America, Vietnam, and other countries.
In 2024, the company demonstrated adjusted EPS growth. Analysts forecast a decline in net income in 2025 due to investment expenses on renewable energy projects.
Despite this, the company is considered extremely promising over the long term. Its current P/E ratio is four times lower than the average over the past 10 years.
AES Corporation has been paying dividends to shareholders for 13 years, with the dividend amount increasing annually. The payout ratio is only 30%.
Risks and Common Pitfalls When Hunting for Undervalued Stocks
Value investing is associated with two global problems. The first is the tendency of people to make emotion-based decisions. Shares that show rising prices are more attractive, making it quite difficult to invest while looking at falling quotes.
The second problem is the necessity to distinguish between truly bargain shopping and merely cheap stocks. In the first case, we are talking about quality companies whose market capitalization is declining due to temporary difficulties, such as those caused by increased capital expenditures, macroeconomic factors, and other variable reasons.
In the second case, we are dealing with a steady deteriorating fundamentals. A natural consequence of this is a decline in stock prices. Such shares are referred to as value traps. The likelihood that their market price will increase over time is low.
Therefore, when searching for undervalued S&P 500 dividend stocks, one cannot limit oneself to merely comparing multiples. It is essential to examine how analysts assess the future prospects of the company.
FAQ
What are the most undervalued dividend stocks?
The most undervalued dividend stocks are dividend stocks with a P/E significantly below the average. They are also referred to as securities that are selling below their fair value. However, the latter parameter is difficult to determine.
What are the six dividend stocks to buy and hold forever?
Among the best undervalued dividend stocks are Ares Capital Corp., Carter’s Inc., Wendy’s Co., FMC Corp., Verizon Communications, and Main Street Capital. All of these companies provide above-average yields and have the highest Financial Score (Very Safe) according to BeatMarket ratings.
What are the most undervalued stocks right now?
Among the securities mentioned, the most undervalued dividend stocks right now are AES Corporation and Carter’s Inc. Their P/E ratios are significantly lower than the average over recent years.
Final Thoughts & Additional Resources
For a person seeking high-quality dividend growth stocks or other high-yield securities, it will be beneficial to explore information about the following types of assets:
- Dividend Aristocrats. These are companies in the S&P 500 that have increased their dividends annually for over 25 years.
- Dividend Kings. These are companies that have raised their dividends for more than 50 consecutive years. This category encompasses a broader market than the previous one, as inclusion in the S&P 500 is not necessary to achieve King status.
- Monthly Dividend Stocks. These are securities from companies that pay dividends every month rather than once a quarter.
To diversify income, other income securities can also be utilized, such as bonds or preferred stocks.
Article Sources
- 10 Undervalued Hidden Gem Dividend Stocks For Savvy Investors.
- Undervalued Dividend paying stocks.
- Bruce Greenwald – Value Investing: From Graham to Buffett and Beyond
