While growth and momentum investing have become very popular in recent years, dividends are still a key driver of overall portfolio returns in the investment world.
One challenge that dividend investors face, however, is the fact that many blue-chip dividend stocks offer very low yields. The average yield across the S&P 500, for example, is currently just 1.5 percent.
Luckily, there are still several higher-yielding stocks out there for investors who are willing to look beyond the most popular dividend investments. Here are two cheap dividend stocks to consider if you’re looking for high dividends in today’s market.
Arrow Financial
Arrow Financial (NASDAQ:AROW) is a bank holding company engaged in a variety of commercial and consumer financing activities.
The company offers real estate, automobile, personal and business loans as well as basic consumer banking services such as checking and savings accounts. Arrow Financial focuses primarily on the northeastern New York market.
Arrow Financial offers an unusually high yield of 6.14% and pays $1.08 per share annually. The company has raised its annual dividend for 30 consecutive years, giving it a solid track record of increases in a variety of challenging market conditions.
Even with its high yield, Arrow’s dividend payout ratio is still just 45.6%. As such, the dividend appears to be in relatively safe territory.
In the most recent quarter, Arrow Financial reported $6.0 million in net income. This represented a 50 percent drop from the second quarter of 2022. Much of the decrease in earnings was attributable to a $12.7 million increase in interest expenses as interest rates rose.
While Arrow was able to recoup some of this loss from a $9.4 million increase in interest income, rising interest rates have generally been negative for the company’s bottom line. On the more positive side, total loans grew 8.6% year-over-year to reach a record of $3.1 billion.
Looking forward, analysts expect Arrow’s earnings to contract by a further 7.5 percent over the coming 12 months. While far from ideal, this likely reflects a slowdown and eventual plateau in interest rate hikes that would leave Arrow in a less vulnerable position.
Only one analyst covers Arrow and has a price target of $22 per share on the stock. Investors should, however, take this with a grain of salt due to the lack of wider analyst coverage.
In addition to its high dividend yield, Arrow Financial appears to be a good value by most traditional valuation metrics. The stock trades at just 7.6 times earnings and 2.1 times its sales.
The company’s price-to-book ratio is even lower at just 0.83. Even with the strong likelihood of contracting earnings over the coming year, Arrow shows several signs of being at least fairly valued at its current price.
Despite Arrow Financial’s appeal in terms of both income and value, investors should be aware that the stock may come with higher-than-usual legal risks. It is currently the target of a cluster of class-action lawsuits that include allegations of financial misreporting and misleading risk statements.
Investors interested in shares of Arrow Financial should carefully consider the potential legal pitfalls the company faces as it has the potential to torpedo the stock if unfavorable rulings are announced.
Weyco Group
Weyco Group (NASDAQ:WEYS) is a footwear producer specializing in higher-end leather shoes. Through its various brands, the company wholesales its products to roughly 10,000 department stores throughout North America. Weyco also sells directly through its own stores and eCommerce channels.
Weyco’s dividend yield is much lower than Arrow’s at 3.58%. Each share of the stock pays $1 annually, and the 3-year compounded dividend growth rate has been a minuscule 0.35 percent.
The upside for investors in Weyco’s dividend, however, is the low payout ratio of 27.8%. At this level, management will likely have ample room to maintain the current dividend and continue raising it gradually in the future.
In addition to offering a solid dividend, Weyco could present a decent growth opportunity for investors. In the most recent quarter, the company’s net sales dropped 10 percent year-over-year to $67 million. Earnings, however, rose 8 percent to a record of $0.50 per share.
Ongoing improvements in gross margins are currently pushing Weyco’s earnings higher, creating at least the potential for higher share prices if the present trend continues.
The chance for higher share prices is also supported by Weyco’s low valuation. At just 7.9 times cash flow, 7.8 times trailing earnings and 0.72 times sales, Weyco stock is priced well below what investors would normally expect from a company with growing earnings.
This fact could present value investors with a decent opportunity in Weyco stock. The company also carries no long-term debt and has a cash reserve of over $21.9 million.
A final point in Weyco’s favor is the company’s burgeoning success as an eCommerce seller. One of the key drivers of the sales decrease in Q2 was the fact that retailers were fully supplied with inventory of Weyco’s products. eCommerce sales offer the company the ability to move beyond this obstacle while also producing higher profit margins.
The main short-term risk in Weyco is the fact that the company’s mid-priced and luxury footwear lines could suffer in the current inflationary environment. Consumers looking to reduce expenses may cut back on premium clothing products, including shoes.
On a longer horizon, Weyco could face stiff competition from other footwear brands. The decline of department stores, which account for much of Weyco’s wholesale customer base, could also present a headwind for the company.
Given the very solid balance sheet, strong value and high dividend that Weyco offers, however, the stock could be well worth the risk for conservative long-term investors. Even with slow dividend growth, Weyco has the potential to be a solid part of a broader income-generating portfolio.
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