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Income Investing: 3 Undervalued Dividend Champtions

Stocks in this article: EV ORI TGT

Mary-Lynn Cesar, Kapitall: Looking for dividend champions to add to your portfolio? Consider the list below. 

One of the most popular type of investments here at Kapitall is dividend champions. Created by the DRiP Investing Resource Center, the term "dividend champion" refers to US companies that have offered and increased dividends over - at minimum - the past 25 consecutive years.

Read more from Kapitall: Deal or no Deal: 6 Undervalued Stocks Reporting Earnings Next Week

While a company's past is no guarantee of its future, having a consistent dividend payment history over 25+ years is encouraging for investors, especially since stocks can eliminate dividend payments whenever they want.

Investing ideas

We decided to run a screen on the current dividend champions, and we chose to make the list more appealing by looking for value investments within the group. To begin, we constructed a universe comprised of stocks currently listed as dividend champions by DRiP Investing Resource Center.

Next, we narrowed that group down by selecting companies with a dividend yield of 2% or greater. We then decided to look for signs of undervaluation amongst those stocks, specifically screening for stocks that are undervalued relative to their cash flows as indicated by high ratios of levered free cash flow/enterprise value.

Levered free cash flow refers to a the free cash flow that remains after a company deducts interest payments on outstanding debt. Enterprise value is a valuation measurement calculated by adding market cap, debt, minority interest, and preferred shares (excluding total cash and cash equivalents). Levered free cash flow/enterprise values ratios exceeding 10% may indicate that the company, as a whole, is being undervalued.

This ratio gives us the money that the business can use to grow and pay dividends to shareholders.  We were left with three stocks on our list.

Click on the interactive chart below to see average analyst ratings.

Do you think now is the time to invest in these undervalued dividend champions? Use this list as a starting point for your own analysis.

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