3 Absurdly Cheap Dividend Stocks to Buy Before August
July 26, 20263 Mins read75
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When it comes to high-yield dividend stocks, it’s not a matter of quantity, but of quality. There are numerous stocks with forward dividend yields of 5% or higher, but many of them are firmly in the “yield trap” category.
That is, either they are at risk of a dividend cut or of price declines that exceed the returns from their quarterly cash payouts. It’s best to be selective with dividend stocks, but filtering for quality, a few stocks stand out as compelling long-term buys in today’s market: Energy Transfer (NYSE: ET), Pfizer (NYSE: PFE), and United Parcel Service (NYSE: UPS).
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Energy Transfer offers a high yield and an AI growth catalyst
Energy Transfer is a master limited partnership (MLP) focused on owning midstream energy assets like pipelines. As a pass-through entity, Energy Transfer pays out most of its pretax income to investors as quarterly cash distributions. Based on the current distribution rate, this MLP stock has a forward yield of 6.6%.
Historically, Energy Transfer has steadily increased payouts by an average of 2% to 4% annually. However, payout growth could be far greater going forward, thanks to Energy Transfer’s indirect exposure to the artificial intelligence (AI) megatrend.
AI data centers, hungry for energy, are boosting demand for midstream energy infrastructure. Capitalizing on this trend, Energy Transfer is targeting 3% to 5% annualized distribution growth in the years ahead. Assuming shares appreciate over the long term in line with distribution growth and this MLP continues to sport an above-average yield, this popular pipeline stock could deliver solid total returns for long-term investors.
“Yield trap” worries are overblown with Pfizer
Pfizer sports a nearly 7% forward dividend yield. Shares also trade at a super low 8.5 times forward earnings. With these metrics, some may see “super bargain,” but others see “value trap,” especially given Pfizer’s weak fiscal performance in recent years.
However, poor sentiment for what has become one of the most undervalued pharmaceutical stocks could work in your favor. Yes, Pfizer continues to contend with dwindling demand for COVID-19 vaccines and treatments. The company also faces a major patent cliff in 2028, when it loses patent exclusivity on its flagship drug, anticoagulant Eliquis.
Still, the company expects the rest of its product lines to experience sales growth of 4% in 2026. Sell-side forecasts call for earnings of $2.94 per share, which, based on annual dividends of $1.72 per share, implies a forward payout ratio of around 59%. That may not be ideal, but if Pfizer can offset declines in COVID-19 and Eliquis sales with new products, it could sustain further dividend growth. Shares will likely rerate back toward a low-teens forward valuation.
United Parcel Service could keep stumping the skeptics
United Parcel Service, better known as UPS, has a forward dividend yield of 5.7%. The company has a 16-year track record of annual dividend increases, but payout growth has slowed in more recent years. There have also been concerns about UPS’ high payout ratio, which could indicate a possible dividend cut down the road.
Yet while UPS may also give off some “yield trap” vibes, there’s a reason why shares in the shipping company have bounced back in recent months. Despite concerns such as Amazon‘s decision to enter the logistics business, favorable developments, like rising freight rates, bode well for the space.
While analysts anticipate flat earnings growth this year, favorable pricing conditions could give way to stronger results in 2027. That’s when consensus estimates call for earnings to increase from $7.13 to $8.02 per share. As earnings bounce and coverage of $6.56 per share in annual dividends further improves, UPS could provide steady cash returns while continuing its recovery. Consider it a buy now, but any subsequent wave of near-term weakness can make it an even stronger long-term buy.
Should you buy stock in Energy Transfer right now?
Before you buy stock in Energy Transfer, consider this:
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Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Pfizer, and United Parcel Service. The Motley Fool has a disclosure policy.
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