Today we’ll look at a popular investing arena: the cheapest dividend stocks in the stock market.

We need to be a little bit careful when hunting for the cheapest dividend stocks, because sometimes dividend stocks are cheap for a reason.

Investors are often enticed by a very high dividend yield and rush into the stock without asking themselves why that dividend yield is so high.

Remember that yield increases as price declines. If you have a $10 stock paying a $1 dividend per share each year, then that stock yields 10%. But if the stock falls to $5 and still pays that $1 dividend, then the yield is 20%.

The question you should be asking is why that stock fell to five dollars in the first place.

It either means that the market has overreacted to some kind of news, or the market has reacted to very bad news in precisely the way it should.

So this article will be about the safest and cheapest dividend stocks.

The Cheapest Dividend Stocks For 2019

If you’re in a hurry, below are our picks for the most lowest priced dividend stocks as of this writing.

1. Ashford Hospitality Trust: Undervalued, brilliantly managed hotel REIT.
2. Penske Automotive Group: Brand name transport company with robust cash flow and room to grow the dividend.
3. Gaming and Leisure Properties: A clever concept that the market hasn’t fully bought into yet, despite its prospects.

Keep reading and you’ll find out more about these inexpensive dividend stocks and my thoughts on each.

What Are Dividend Stocks?

Dividend stocks are companies that have enough free cash flow to pay out a dividend to shareholders, usually every quarter. These are companies that have generally been around for at least 10 years, and that are businesses that have reached a level of success to the point where they can return capital to shareholders.

Companies that are young need to constantly reinvest any free cash flow into growing the business. However, at a certain point, a company reaches a certain level of success where it can divert some of that capital for other purposes. Those other purposes are usually to pay down debt, buyback stock, or pay a dividend to shareholders.

Companies that continue to grow are also likely to pay a higher and higher dividend each year.

Bargain dividend stocks are difficult to come by in the stock market. That’s because the Federal Reserve has kept interest rates so low for so long, that income investors started seeking out other places to find income.

Thus, they started buying up dividend stocks. That pushed the prices of many of the stocks higher and out of the range of being bargains.

Read Also: What is a Dividend?

How Do You Determine What Qualifies As The Cheapest Dividend Stocks?

The cheapest dividend stocks have at least two of these three characteristics:

1. PEG ratio of 1.2 or less.
2. A dividend yield of at least 3.5%
3. History of strong cash flow

PEG ratio of 1.2 or less

To my mind, the cheapest dividend stocks these days are those that are selling at a price to earnings ratio that is no more than 20% higher than their projected growth rate in earnings.

I’ve actually had to adjust that metric a little bit, as it used to be a PEG ratio of 1.0 or less. The market has gotten so expensive and dividend stocks that I permit a premium on what I consider to be value dividend stocks, but only if there are other characteristics that make it a worthwhile purchase.

in some cases, a PEG ratio may not apply such as with real estate investment trusts. In that case, I look at the historical price of the REIT to help guide me with respect to valuation.

Dividend yield of at least 3.5%

Because I choose to purchase the cheapest dividend stocks in the market, as opposed to ones that are relatively expensive, the total return potential for these dividend stocks is a little bit higher. That’s because they have more room to grow earnings before reaching intrinsic value, thus there is the prospect for capital gains in addition to the dividend.

That’s the only reason I would even consider a stock with a 3.5% yield. Otherwise I would insist on 5% or more, because inflation is actually much closer to 8% is supposed to 3%, which is what investors are told.

History of strong cash flow

As I mentioned, you have to be careful that a company that pays a dividend has enough free cash flow to pay that dividend. If a company cuts its dividend, the stock is very likely to fall dramatically as a result. That goes back to what I said about investors flocking to dividend stocks because they are so desperate to find yield.

Thus, I like to see dividend stocks have at least a four year history of generating enough cash flow to pay their dividend. The only exception I will grant are to companies that have no capital expenditures or have enough net cash in the bank to cover the dividend for several years.

Remember, as investors, we want to know that a company has a very long growth trajectory ahead of it so that it will not only continue to pay a dividend, but grow that dividend.

Here’s a video that provides some additional information on investing in dividend stocks.

Ashford Hospitality Trust

What is it?

Ashford Hospitality Trust is a hotel REIT, with 120 hotels in its portfolio. The portfolio is broadly diversified across both brand and geography, with a focus on upper upscale, upscale, and luxury hotels.

What makes it a cheap stock?

Ashford has numerous things going for it. At the top of the list is senior management that has well over 100 years of combined experience in the hospitality industry. That has led to some very careful and prudent management of the company since its IPO some 13 years ago.

The real test of management for any company is what happens when times are bad. During the financial crisis of 2008 and 2009, where hotels were experiencing revenue declines of 20%, Ashford management got very aggressive with cutting expenses, eventually cutting them 20% to match the declining revenue.

The company emerged on top of the entire hotel sector, and has managed its portfolio exceptionally well, while also using their expertise to buy up hotels and improve their cash flow efficiency.

Ashford is one of the safest and cheapest dividend stocks in the market right now, inexplicably trading at multi-year lows and yielding a sustainable 9.86%.

Penske Automotive Group

What is it?

Penske is a transportation services company, which operates car and truck dealerships in North America and Western Europe. It sells both new and used cars, and offers several finance an insurance products, as well as other high-margin aftermarket products.

What makes it a cheap stock?

Whereas most dealerships have a limited footprint, Penske has 343 franchises around the world and offers a diverse set of autos and trucks. Not only doesn’t sell new and used vehicles, it also distributes engines, power systems, parts and services, and has a sizable finance and insurance arm that delivers high margins.

Penske is also a world-class and recognized brand name.

It is an extremely profitable business, with net income of $287 million in 2014 more than doubling to $613 million in 2017 and about $700 million in the past 12 months. As a result, its cash flow has been very stable, generating about $200 million annually, and $435 million in the past twelve months.

Yet, Penske only pays out about $120 million in dividends each year (3.52% yield), and only trades at 7x next year’s earnings with a PEG ratio of 1.0.

Gaming and Leisure Properties

What is it?

The company has a very clever conceit: to acquire, finance, and own real estate that is then leased to gaming operators. Those operators not only are responsible for maintenance of their facility, but insurance, and all taxes and utilities.

What makes it a cheap stock?

Gaming and leisure properties focuses on casinos that are both land-based and at dockside, along with horse racing facilities. There are three terrific things about this company that makes it one of the best and cheapest dividend stocks.

First, it operates with tenants in triple net lease situations. That means the tenants are responsible for virtually all expenses associated with the property, as mentioned above.

Thus, the casino is responsible for getting people in the doors to generate to pay those expenses. If they don’t, the company just swoops in and takes over.

Casinos happen to be perennial destinations, places that are always generating revenue even in the bad times.

Finally, the company is making money hand over fist. It’s $273 million in cash flow in 2014 has grown to $612 million in the past 12 months and has no capital expenditure offset.

The result is that it is able to use most of its cash flow to fund its very generous 7.75% yield. It trades at 15x earnings and has a PEG ratio of 1.16.