Buying a dividend stock at a cheap valuation can be a great move for several reasons. If a stock has declined in price but management has maintained its payout, new buyers can get a higher-than-usual yield from the investment. And if the underlying business is still in good shape, the share price decline may not be a lasting one -- so investors could profit from buying the stock and holding on for the eventual rebound.
Three stocks that may be underrated options for dividend investors to consider today are PepsiCo (NASDAQ: PEP), United Parcel Service (NYSE: UPS), and Merck (NYSE: MRK).
1. PepsiCo
Shares of beverage and snack giant PepsiCo haven't traded at this price since 2021, and its price-to-earnings (P/E) ratio has only been this low a couple times in the past five years.
Investors were bullish about the company in recent years as it was able to grow its sales even during periods of high inflation, and successfully passed its rising costs along to consumers. But now, its growth rate is slowing, and there appears to be more of a pushback from consumers against price hikes. As a result, investors aren't as eager to buy up the stock anymore.
The bad news is that sales haven't been great. In the fourth quarter of 2024, PepsiCo's revenue totaled $27.8 billion -- close to flat compared to the same period in 2023. The good news, however, is that its profits rose by 16% to more than $1.5 billion.
PepsiCo stock is down roughly 14% in just the past year, and with the dividend yielding 3.6% at Wednesday's closing price, now may be an opportune time for investors to load up on this Dividend King.
2. United Parcel Service
Shares of United Parcel Service fell by more than 16% after the company released its earnings numbers in late January and announced a key change in strategy -- it's moving away from relying on Amazon. While the massive online retailer is its largest customer, the two companies have agreed on a plan that will cut the volume of Amazon deliveries UPS handles to less than half of its current volume by the second half of 2026.
That may sound like bad news, but UPS CEO Carol Tome says it should help with the logistics giant's overall profitability. While it may lead to lower revenue, if the end result is better margins and a stronger bottom line, that's ultimately what investors should care about. Growing sales without regard for margins often leads to trouble down the road for growth-minded businesses if their profits remain modest or nonexistent. The fact that UPS is focusing on its margins can make the stock a much better investment over the long run.
UPS is projecting $89 billion in revenue for the current year, which will be less than the $91.1 billion it reported for 2024. That, along with the Amazon-related news, has sent the stock tumbling to levels it hasn't seen since 2020. But with UPS positioned as a leader in the logistics industry, it can be a great long-term investment to buy right now, especially as it focuses more on its bottom line. At the current share price, the stock also yields a fairly high 4.9% -- about four times the S&P 500's average of 1.2%.
3. Merck
Healthcare giant Merck's dividend yields 3.3% at its current share price as it trades around its lowest share price since late 2022.
Investor sentiment on Merck has been down of late as the company has announced it is pausing shipments to China of its Gardasil vaccine, which offers protection against many types of human papillomavirus (HPV), as demand in that market has not been strong and inventory levels are sufficient for now. There's also the possibility that a trade war between the U.S. and China may adversely impact Merck's sales there in the future.
This isn't the only concern for investors. There are also worries that the company's top-selling cancer drug, Keytruda, will experience significant sales declines in the years ahead as biosimilars enter the market, potentially as early as 2028. But the China-related concerns have been the driving force sending the stock lower in recent days.
However, with Merck's stock trading at less than 10 times its estimated future earnings (based on analysts' expectations), it could make for an intriguing pick to buy and hold for the long haul. The company remains profitable and it is working on bringing a subcutaneous form of Keytruda to market, which could give the drug's sales another way to grow.
While the company is facing challenges right now, investors shouldn't give up on the business just yet. Investors will need to have some patience with this healthcare stock, but it could prove to be an underrated buy.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Merck. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
