A thousand dollars might seem like loose change in the world of dividend investing. After all, a $1,000 investment in a dividend stock with a 5% yield would generate only $50 in extra cash each year -- and that gain could easily disappear if the underlying stock sheds more than 5% of its value. That's why many dividend investors shifted toward safer CDs and T-bills as interest rates rose over the past two years.
However, over time investors who buy a stable dividend stock and reinvest its dividends can still generate much higher total returns than CDs or T-bills offer. For example, a $1,000 investment in dividend stalwart Coca-Cola (NYSE: KO) would have turned into $11,300 after reinvesting its dividends over the past three decades. That same investment in a 30-year CD with an annual percentage yield of 5% would have grown to only around $4,300.
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Not every dividend stock is as dependable as Coca-Cola, but investors who put $1,000 in Verizon (VZ 0.30%), UMC (UMC -1.40%), or Altria (MO 0.25%) while they're trading at low valuations with high yields might be well-rewarded in the future.
1. Verizon
Verizon's stock tumbled 36% over the past three years as it struggled to expand its core wireless business. It added only 201,000 postpaid phone subscribers in 2022 and lost about 19,000 subscribers in the first nine months of 2023. That slowdown was driven by its loss of consumer subscribers, which offset its growth in business subscribers.
Yet most of that slowdown occurred in the first quarter of 2023, with its loss of 127,000 postpaid phone subscribers. After that big setback, it added 8,000 subscribers in the second quarter and gained 100,000 subscribers in the third quarter.
The stabilization of that core business, along with the ongoing expansion of its smaller broadband business, which gained more than 400,000 quarterly net adds over the past four consecutive quarters, suggests Verizon isn't down for the count yet.
Verizon also raised its full-year free cash flowoutlook in its latest quarter, raised its dividend for the 17th consecutive year, and pays a forward dividend yield of 7.1%. The stock also looks cheap at eight times forward earnings -- and that low multiple should limit its downside potential as it resolves its near-term problems.
2. UMC
UMC, the second-largest chip foundry in Taiwan, doesn't attract nearly as much attention as its big brother, Taiwan Semiconductor Manufacturing, (NYSE: TSM). That's mainly because UMC manufactures older, larger, and less power-efficient chips than TSMC.
Five years ago, UMC stopped chasing TSMC and Samsung in the capital-intensive "process race" to manufacture smaller and denser chips. Instead, it chose to focus on steadily producing cheaper chips for the automotive and Internet of Things (IoT) markets. That conservative approach enabled it to profit from the secular expansion of the semiconductor market without worrying too much about the availability of high-end lithography hardware or looming government sanctions.
Like TSMC, UMC suffered a slowdown in 2023 as the semiconductor market weakened. But from 2023 to 2025, analysts expect its revenue to grow at a compound annual growth rate of 13.5% as the macro environment improves.
UMC's stock has already risen nearly 350% over the past five years, yet it still looks surprisingly cheap at 13 times forward earnings and pays a hefty forward dividend yield of 7.4%. By comparison, TSMC trades at 16 times forward earnings and pays a lower forward yield of 1.9%. Therefore, investors who want a good dividend play with plenty of exposure to the recovering semiconductor sector should take a much closer look at UMC.
3. Altria
Altria, the largest tobacco company in America, has struggled with declining smoking rates for decades. It has offset that pressure by raising its prices, cutting costs, and repurchasing shares to boost its earnings per share (EPS) as its revenue growth stalled out. Analysts expect its revenue and adjusted EPS to rise just 1% and 3%, respectively, in 2024.
Altria also tried to curb its dependence on traditional cigarettes by acquiring a 35% stake in the domestic e-cigarette maker Juul for $12.8 billion in 2018. However, Altria was forced to take a massive writedown on that investment after the U.S. Food and Drug Administration (FDA) banned all of Juul's products last year.
Now, it is trying to bounce back from that action by buying e-cigarette maker NJOY, which already had its products cleared by the FDA, for $2.75 billion this past June.
Altria's shrinking tobacco business and messy e-cigarette plans caused its stock to decline 18% over the past five years. But with a forward multiple of 8 and a forward dividend yield of 9.7% -- which has been raised every year since it spun off its overseas business as Philip Morris International in 2008 -- too much doom and gloom might be priced into its stock.
If Altria continues to cut costs, stabilize its cigarette business, and expand NJOY, it could still be a great long-term investment.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Philip Morris International and Verizon Communications and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
