3 Underrated Dividend Stocks for Your Portfolio

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Dividends play an important role for many investors. With interest rates remaining near historic lows and key demographic changes shaping future financial needs, dividends can provide a stable source of cash flow that exceeds the rate on bonds or savings accounts. They can also help investors lock in returns through years of stable payments. While dividends have gained popularity in recent years, there are some dividend-paying companies that are often ignored.

Last year, dividends paid by the world’s listed companies reached a record high of $1.03 trillion, according to the Henderson Global Dividend Index. Dividends are up $310 billion since 2009. The United States accounted for one third of the global total, while emerging markets made up $1 in every $7 of global payouts.

“The trillion dollar dividend is a huge milestone for equity investors and illustrates that dividends are now a vital component of investors’ returns,” said Henderson CEO Andrew Formica. “The search for income is more than just a response to rock bottom interest rates in recent years. It marks a generational shift as aging populations must increasingly rely less on state pensions and more on their own savings to provide for retirement. Not only that, but they will need to stay invested in equities much longer than in the past too. This demand for equity income is a trend we see continuing through 2014 and beyond.”

Let’s take a look at three dividend-payers that investors may want to consider for their portfolios.

1. BP (NYSE:BP)

Dividend yield: 4.6 percent

Energy is one of the most undervalued areas of the market, but many people absolutely despise BP in the wake of the disastrous Deepwater Horizon oil spill. BP’s Gulf of Mexico disaster was the worst offshore spill in U.S. history. It began on April 20, 2010, when an undersea well exploded 50 miles off the Louisiana coast, killing 11 workers and spewing millions of barrels of crude oil into the ocean. Overall, $42.4 billion has been spent or earmarked for spending on clean-up, compensation, fines, and other costs.

While shares of BP have lagged the market in recent years, the company has improved its financial position and looks set to return value to shareholders. At the end of October, BP announced a dividend hike and that it would be selling another $10 billion in assets before the end of 2015, with most of the proceeds going toward share repurchases.

BP attracted Greenlight Capital Founder David Einhorn last year at an average price of $47.39 per share. “The Deepwater Horizon oil spill was nearly four years ago. Since then, investors have focused on the ensuing legal cases regarding clean-up and restitution efforts, while overlooking BP’s improved return on capital in its core businesses,” said Einhorn, in his quarterly investment letter. “Allowing for more negative legal outcomes than BP has currently provisioned, we believe the company’s net asset value is nearly $70 per share.” Einhorn added that, “Further, BP has restricted capital expenditures and increased dividends — all evidence of a more shareholder-friendly approach. As the legal issues subside, we expect the market to appreciate BP’s portfolio value and its improved capital allocation.”

2. DuPont (NYSE:DD)

Dividend yield: 2.7 percent

DuPont has been a member of the Dow Jones Industrial Average since 1935, but receives little attention compared to other blue chips. DuPont is an American chemical company that has been bringing innovative products to the marketplace since 1802. Every year, the company introduces thousands of new products and patent applications, serving markets such as agriculture, nutrition, electronics and communications, safety and protection, home and construction, transportation, and apparel. Last year, Dupont was named to Thomson Reuters 2013 World’s Top 100 Most Innovative Organizations for the third consecutive year.

Recently, DuPont announced that first-quarter sales and earnings will be “challenged by the extended cold temperatures and winter storms in North America.” However, the company maintained its 2014 outlook for earnings and is poised to return capital to investors. In January, Dupont announced its 438th consecutive quarterly dividend and unveiled a $5 billion repurchases program. Over the next year, the company will transition to a higher growth, higher value company by spinning off its performance chemicals segment.

“After separation, DuPont will have the optimum portfolio and will benefit from more consistent earnings growth and lower volatility, enhancing our ability to deliver more sustained growth and invest in future opportunities,” explained Dupont CEO Ellen Kullman. “Performance Chemicals will emerge as a top global industrial chemicals company with industry leading products and strong cash flow.”

3. Banco Santander (NYSE:SAN)

Dividend yield: 8.9 percent

Founded in 1857, Banco Santander is the largest bank in the eurozone and one of the largest in the world in terms of market capitalization. It was named the Best Bank in the World in 2012 by the annual Euromoney ranking, the third time in recent years. The Spanish bank has more than 100 million customers and was also named the Sustainable Global Bank of the Year by the Financial Times and International Finance Corp.

The eurozone’s debt crisis was swept under the rug this past year and will likely return at some point in the future, but the financial sector should still receive support from Mario Draghi’s “do-whatever-it-takes” approach. If there’s one thing central banks have proven during the financial meltdown, it’s that they will support large financial institutions at any cost.

Shares of Santander were crushed during the financial crisis, plunging from $22 to only $6. However, shares have stabilized over the past two years and currently offer investors a dividend yield of almost 9 percent. Even if that dividend gets cut in half due to financial weakness, investors who are looking for some European exposure are still left with a sizable yield.

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