2 Beaten-Down High-Dividend Stocks Poised for a Sharp Rebound

If you're looking for juicy dividend yields, consider these steady income generators that investors are unfairly punishing.
By John Persinos ,

The stock market permabears are once again wringing their hands, this time over China's latest five-year plan. This week, China's leaders announced a target for annual economic growth from 2016 to 2020 of "only" 6.5%.

Unwarranted pessimism about the world's second largest economy, as well as about the prospects for the U.S. and Europe, continues to weigh on commodity and energy prices. Two stocks are bearing the brunt for their respective sectors: BHP Billiton (BHP) - Get Report and Chevron (CVX) - Get Report . Year to date, BHP Billiton's shares have fallen 31% while Chevron's have slid 16%.

The prices of these stocks won't stay down for long, though. And in the meantime, income investors can enjoy fat dividend yields of 7.2% for BHP Billiton and 4.5% for Chevron.

Wall Street's perennial prophets of doom need to take a deep breath, step away from the ledge and acknowledge that most nations would envy economic growth of 6.5%.

With nearly 1.4 billion people, China is the world's most populous country. The rapid urbanization of the Middle Kingdom and the Western-style consumption habits of its rising middle class are trends that will continue to unfold for decades. China's abandonment last week of its one-child-per-family policy and its allowance for each family to have two children, further ensures the inevitably of these demographic trends. Meanwhile, key U.S. economic indicators remain on track (albeit tepidly), and European central banks are making commitments to growth-oriented policies.

Let's take a look at two unloved but inherently strong stocks, and why they're undervalued bets for growth as well as income.

BHP data by YCharts

1. BHP Billiton

Global demand for iron ore and other essential materials has been weak, but it's positioned to post better growth through the end of the decade, especially from China and India. That bodes well for low-cost producers with entrenched customers in Asia, such as the Anglo-Australian multinational mining behemoth BHP Billiton.

In its fiscal 2015 results BHP Billiton reported earnings per share of $1.20 for year. That was down more than 50% from fiscal 2014. That's bleak on the surface, but some context is called for. Iron ore, which accounts for roughly 33% of BHP Billiton's revenue, has plummeted more than 40% in price over the past year. That means BHP Billiton has more than held its own in a severely depressed market.

And regardless of its temporary economic ups and downs, China continues to plow enormous resources into infrastructure construction and urbanization, making it a reliable BHP Billiton customer over the long haul.

BHP Billiton's valuation is low and shares should rally as construction in North America continues to accelerate. Meanwhile, as European-based central banks this year loosen the money spigot in the eurozone, construction activity should also increase there. Another optimistic spot is Japan, which last month reiterated its commitment to public works, lower interest rates and easier lending policies.

At the same time, BHP Billiton is aggressively streamlining operations. Over the past several years, BHP has sloughed off low-performing operations worth billions of dollars, including facilities in the U.S., Australia, Canada, South Africa and the U.K. On the selling block were assets that produced petroleum, coal, copper, mineral sands, uranium and diamonds, as management sought to focus the company's holdings.

This tight style of management is one reason why BHP Billiton was one of the very few resource producers to boost dividends during the global financial crisis of 2008-2009. If this dark period is any indication, BHP Billiton will emerge from today's materials sector slump stronger than ever at the expense of weaker rivals.

With a robust balance sheet, low debt and ready access to capital, this leading miner enjoys plenty of options for withstanding any future resource slumps.

CVX data by YCharts

2. Chevron

Chevron recently reported third-quarter revenue of $34.3 billion, down 37% from $54.7 billion in the third quarter of 2014. Nevertheless, the latest revenue figure easily topped the average estimate from analysts, which was $26 billion. So far in 2015, Chevron has beat revenue estimates in every quarter.

Third-quarter EPS came in at $1.09, compared to EPS of $2.70 in the same quarter a year earlier. EPS in this latest quarter beat expectations of 76 cents.

The pattern is clear: Chevron has a habit of blowing the doors off Wall Street's gloomy expectations, unlike its main rival Exxon Mobil which has shown less commitment to rationalizing assets.

Oil will remain the lifeblood of industrial society, and that won't change anytime soon, regardless of inroads made by renewable energy sources. In a recent indication that the slump in oil and gas prices could soon end, political strains have emerged in the OPEC cartel, as members publicly indicate their willingness to exceed Saudi-imposed quotas.

Saudi Arabia has purposely fostered a glut of oil, largely to hurt Russia and shale producers in North America, but the kingdom can maintain its destructive "price war" for only so long, without pushback from oil producers that are struggling to make ends meet with sharply depleted coffers.

And while OPEC squabbles and energy markets gyrate, Chevron continues to strengthen its business for the day when oil prices come back. The California-based company is focusing on profitable overseas projects, shedding nonperforming assets and slashing debt. The company is keeping its powder dry, to exploit better opportunities when oil rebounds and to sustain its robust dividend.

Warning: some stocks deserve to be unloved! For a list of stocks in "critical" condition that are on the verge of collapse, click here.

John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

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