7 Discounted Dividend Stocks With Market-Beating Yields

Citigroup

• Market value: $131.7 billion
• Dividend yield: 3.1%
• Forward price-to-earnings (P/E) ratio: 8.6
• Discount to historic valuation: -18.9%

Citigroup (C, $66.36) ranks as the third largest U.S. bank. After being fined $400 million in late 2020 for weak governance and internal controls, the financial firm changed its leadership last year while also announcing a major business overhaul to improve returns. Citi is exiting retail banking in India and 12 other countries where it lacks scale and focusing instead on wealth management in four key markets – Singapore, Hong Kong, London and Dubai.

Citigroup is reportedly close to selling its Taiwan consumer banking unit to a Singapore company for $2 billion and has already shed retail banking operations in Indonesia, Thailand, Malaysia and Vietnam. In addition, the bank plans to sell its consumer banking franchise in Mexico. Completion of the restructuring is targeted by 2023.

According to management, once the business overhaul is completed, Citigroup anticipates freeing up $7 billion of capital, which can be returned to investors or reallocated to its higher-return businesses.

In the fourth quarter, Citigroup's revenues rose 1% on a year-over-year basis. Earnings per share (EPS), on the other hand, declined 26% mainly due higher costs and the impact of $1.2 billion of write-offs related to business sales. Excluding these charges, EPS improved 4%, thanks in part to a 4% reduction in shares outstanding.

Even with these lackluster top-line results, Evercore analyst Glenn Schorr doesn't envision much downside to C stock from current levels as the turnaround plan continues to be executed.

C is one of the cheaper dividend stocks around, trading at 8.3 times forward earnings – a 21% discount to its five-year average P/E ratio. Citi also trades at just 0.7 times book value, a 43% discount to its fellow financial stocks and nearly 20% below its historic book value multiple. Plus, C's robust 3.2% dividend yield appears safe given payout ranges around 20%.

Civitas Resources

• Market value: $4.7 billion
• Dividend yield: 3.2%
• Forward P/E ratio: 9.2
• Discount to historic valuation: -23.9%

Oil and gas producer Civitas Resources (CIVI, $55.17) was formed last November through the combination of three firms – Bonanza Creek, Extraction Oil and Gas and Crestone Peak Resources. The new entity develops and produces crude oil, natural gas and natural gas liquids in Colorado's Denver-Julesburg Basin, where it operates approximately 500,000 acres and produces roughly 160,000 barrels per day.

Civitas Resources is the largest pure-play energy producer in this prolific basin and recently became the state's first carbon neutral oil and gas producer by purchasing enough carbon credits to fully offset its carbon emissions.

While the company's primary focus is improving economic returns and cash flow rather than growth, Civitas Resources delivered strong September quarter adjusted earnings of $1.79 per share – beating consensus analyst estimates by 22 cents per share – and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) per share of $3.74. These results underscore the exceptional safety of CIVI's dividend; payout stands at just 15% of adjusted EPS and 12% of cash flow.

The company expects to maintain broadly flat 2022 production while investing 50% of cash flow in new drilling. This will leave the remaining 50% for dividend growth, acquisitions and other value creation strategies. Civitas Resources is supported by a fortress-like balance sheet showing a 0.3x ratio of debt-to-EBITDA. The company is committed to maintaining this ratio below 0.5x.

In addition to exceptional financial strength, CIVI's competitive advantages include the lowest overhead costs per barrel of its peer group, an advantage likely further enhanced by yet unrealized synergies and economies of scale as the integration is completed.

What makes CIVI one of the best discounted dividend stocks?

The company hiked its dividend 32% (relative to pre-transaction levels) in the December quarter and shares offer the highest base dividend in its peer group. Going forward, the company also plans to return 50% of free cash flow after the base dividend to investors via variable dividends.

CIVI is valued at 9.2 times forward earnings – a roughly 30% discount to its fellow energy stocks. Shares earn a Buy rating from all six of the Wall Street analysts following it. Bulls like it because of its solid balance sheet and cash flow generation, as well as its commitment to returning half of free cash flow (FCF) to investors via dividends.

Rio Tinto Group

• Market value: $124.1 billion
• Dividend yield: 9.3%
• Forward P/E ratio: 5.5
• Discount to historic valuation: -38.0%

Rio Tinto Group (RIO, $76.64) is one of the world's largest mining companies and a global leader in iron ore, aluminum and copper production. At present, RIO is benefitting from surging metal prices that have resulted from a recovery in industrial demand, stepped-up infrastructure spending and new green energy initiatives. Demand-driven price gains have more than offset modest production declines resulting from COVID-19 staffing challenges.

The company's first-half 2021 earnings more than doubled, easily beating consensus analyst estimates. RIO also hiked its dividend 142.5% to $3.76 per share and treated investors to a $1.85 per share special dividend in 2021.

Rio Tinto Group hopes to reduce cyclicality and make its business more attractive to investors by decarbonizing its global footprint, investing in "green" steelmaking and ramping up production of metals like lithium needed for IT and clean energy projects.

For example, the company is acquiring the Rincon lithium mine in Argentina and had planned to invest $2.4 billion in a Serbian lithium mine. The Serbian mine has hit roadblocks from environmental groups, but Rio Tinto says it remains committed to this project, which would position the company as Europe's largest lithium supplier for at least the next 15 years.

Other potential investment risks come from the company's high exposure to China, which accounts for nearly 60% of Rio Tinto's revenues. In addition, Rio Tinto Group is being targeted by activist investor Pentwater Capital for its corporate governance practices.

RIO shares are down roughly 20% from their mid-2021 peak near $95, resulting in one of the more attractively valued dividend stocks. RIO is trading at just 5.5 times forward earnings, which is a 40% discount to the company's five-year historic forward P/E.

Dividends have grown five years in a row, but payout is somewhat high at 74% of adjusted EPS. Still, the company has more cash than debt, at $16.9 billion and $13.5 billion, respectively.

Morgan Stanley analyst Alain Gabriel upgraded RIO to Overweight from Equalweight (the equivalents of Buy and Hold, respectively) in December. He thinks the negative news is fully priced into the stock and sees upside tied to China's improving economic outlook.

Lennar

• Market value: $27.0 billion
• Dividend yield: 1.6%
• Forward P/E ratio: 5.8
• Discount to historic valuation: -42.6%

Homebuilder Lennar (LEN, $92.03) is a top three builder in each of its 33 largest U.S. markets. The company's operations are geographically diverse with some areas of concentration that include Florida (29% of homes), Texas (16%) and California (14%). In the past six years, Lennar has doubled its number of delivered homes from 27,500 in 2016 to nearly 60,000 in 2021. Plus, the company's new home orders have consistently outpaced deliveries over that same time frame.

A robust housing market bodes well for Lennar's near-term growth. UBS analyst John Lovallo sees housing demand continuing to rise this spring. The analyst initiated coverage on the stock in late January with a Buy rating and a $145 price target, representing implied upside of 57.6% to current levels.

Lennar is distinguishing itself from competitors with technology. The company is partnering with ICON on the world's largest neighborhood of 3-D printed homes. It also teamed up with Veev to construct houses from a panelized technology that can complete builds four times faster than conventional methods.

Lennar achieved the highest sales, earnings, home orders and deliveries in its history during fiscal 2021. Sales rose 21%, EPS grew 82% and deliveries increased 13%. Management expects to deliver approximately 67,000 new homes in fiscal 2022. Analysts, meanwhile, estimate 2022 earnings of $15.93 per share (+11.6% year-over-year) rising to $17.08 per share in fiscal 2023.

Signaling its confidence, Lennar hiked its dividend 50% in January to a new annual rate of $1.50 per share. Lennar has a 32-year track record of consecutive dividend payments and tripled its quarterly payout in 2020. There's plenty of room for future dividend growth too, with payout at a low 9% of EPS.

When it comes to dividend stocks, this one is cheap. At present, LEN shares trade at 5.8 times forward earnings, which is a 39% discount to the stock's five-year average.

Olin

• Market value: $7.7 billion
• Dividend yield: 1.6%
• Forward P/E ratio: 5.5
• Discount to historic valuation: -68.5%

Olin (OLN, $48.89) manufactures chemicals for industrial and agricultural applications such as chlorine and caustic soda, vinyls and epoxies. The company is the world leader in producing epoxies and chlor-alkali and the North American leader in bleach and acids. In addition, Olin's Winchester business is the world's top producer of small caliber ammunition used by law enforcement, the military and recreational shooters.

The company plans to boost profits by exiting or downsizing low-margin businesses and focusing on growth areas like epoxies, which are used to build electric vehicles, wind turbines, ships and containers and in infrastructure projects. Another growth area is Winchester, which benefits from 14 million new recreational shooters added in 2020 and 2021.

Olin generated record September quarter earnings from its epoxy and Winchester business segments and posted nine-month EPS totaling $6.07 – swinging to a profit from last year's $5.94 per-share loss. Consensus analyst estimates project 2021 EPS at $9.02, which would be an 11.1% improvement from the year prior.

The company has a 32-year track record of paying dividends, but has held the dividend rate steady for more than 20 years. That could change given the current 1.6% yield on OLN shares that is less than half of the stock's five-year average 3.4% yield.

Payout is ultra-safe at 10% of earnings and the company's balance sheet is solid, showing net debt at just 1 times EBITDA. Olin hopes to increase returns via a recently initiated $1 billion share repurchase. The company has also launched a cash tender offer to redeem $350 million of 9.5% senior notes due 2025.

Investors looking for discount dividend stocks should take a closer look at OLN. Shares are valued at just a 5.5 times forward P/E multiple, which is a nearly 69% discount to the stock's five-year average.

Analysts are certainly bullish on OLN. The stock has Buy or Strong Buy ratings from 11 of the 15 Wall Street analysts tracking it. The pros appreciate the company's efforts to ramp up pricing power in a market where demand exceeds supply.

Camping World Holdings

• Market value: $1.5 billion
• Dividend yield: 6.2%
• Forward P/E multiple: 4.9
• Discount to historic valuation: -69.0%

America's largest retailer of recreational vehicles (RVs), Camping World Holdings (CWH, $33.22) has grown both organically and via acquisitions from a pure-play RV dealership 10 years ago to a vertically integrated, one-stop shop for new and used RV sales and rentals, repair and servicing, warranties, financing and affiliated campground facilities. A related business, Good Sam Services, provides roadside assistance and member discounts on campsite rentals and fuel purchases.

RV demand is at an all-time high, according to Camping World CEO Marcus Lemonis, and this helped CWH achieve record sales and trailing 12-month adjusted EBITDA in the September quarter. Sales rose 14% year-over-year and adjusted EBITDA grew 33% in the three-month period.

CWH also increased full-year adjusted EBITDA guidance to $915 million to $930 million from earlier projections of $840 million to $860 million. Consensus analyst estimates target EPS at $6.53 for fiscal 2021, +78.4% YoY.

The future outlook for RV sales remains bright too. According to the RV Industry Association, 72 million Americans are planning an RV trip in 2022, up from 61 million last year. Additionally, economic research firm ITR Economics recently increased its forecast for RV shipments to over 600,000 units in 2022.

Camping World Holdings doubled its annual dividend last August and maintains a modest 30% payout. The company has been paying quarterly dividends since 2017 and frequently pays special dividends. Dividend yield is generous at 6.2%, especially considering the many payments of special dividends.

What's more, this is another one of the dividend stocks that appears bargain-priced at current levels. CWH is trading at a 4.9 times forward earnings, which is a nearly 70% discount to its five-year average.

High short interest in the stock is a potential investor concern as is the company's relatively high financial leverage. However, CWH's ratio of free cash flow-to-debt is rising, which may set the stage for aggressive deleveraging.

Viatris

• Market value: $18.5 billion
• Dividend yield: 3.2%
• Forward P/E ratio: 4.1
• Discount to sector peers: -80.3%*

Viatris (VTRS, $15.26) was formed in late 2020 after Pfizer's (PFE) spunoff Upjohn business combined with generic drugmaker Mylan. Viatris owns a portfolio of generic drugs, biosimilars and various off-patent branded drugs that include Lipitor, Viagra and EpiPen. The company is implementing a two-phase growth plan focused initially on deleveraging, synergies and dividend growth (2021-23) and, longer term, transitioning to pipeline expansion and acquisitions.

Viatris hit the ground running, generating impressive growth for its branded products during the first nine months of 2021. The company is also on track to deliver $690 million of new product revenues in 2021 from new drugs, and generic versions of Eylea and Botox could help fuel longer-term growth too.

Viatris is a cash-flow machine, expected to generate $2.5 billion of free cash flow in 2021. The company has used its cash to pay down $1.9 billion of debt through the end of September, as well as raise its dividend. The greatly improved balance sheet showed $965 million in free cash flow and $1.9 billion of remaining long-term debt in the September quarter. Growth in future FCF will be fueled by operating synergies from combining the two businesses projected to total $1.0 billion by 2023.

Viatris increased its full-year 2021 guidance for revenues, adjusted EBITDA and free cash flow in November.

The company was reportedly in discussions in early December to merge its Mylan biosimilar business with India's Biocon Biologics and spin off the newly formed entity in a $10 billion initial public offer (IPO). In addition to potential plans to boost shareholder returns via a spinoff, Viatris hiked its dividend 9% in January. At the new rate, VTRS shares yield 3.2% with a meager 9% payout.

This dividend stock is deeply discounted, trading at just 4.1 times forward earnings. It's also valued at a low 4.6 times forward price-to-cash flow.

Evercore ISI analyst Umer Raffat questions the timing of a spinoff, but thinks Viatris could boost the value of its biosimilar business by merging with Biocon. Raffat has an Outperform rating on VTRS stock.

* VTRS's valuation compared to its sector peers