3 Dirt Cheap Dividend Stocks That Are Passive Income Machines

The COVID-19 pandemic has dramatically changed the way many people work. Today, it’s easier than ever to have a side hustle, multiple freelance jobs, and even multiple sources of income—all while working from home.

Even with the dawn of the gig economy, dividend stocks are one of the most proven ways to generate passive income. Dividend-paying stocks can be especially important during times of economic turmoil and market volatility because they offer income without having to sell shares. That way, an investor doesn’t have to worry as much about short-term stock prices.

Starbucks (NASDAQ:SBUX), JPMorgan Chase (NYSE:JPM)and The home depot (NYSE:HD) are three excellent dividend stocks that also happen to be cheap. Here’s what makes any business a great buy now.

A person stacks gold coins in stacks on top of gold and black hexagons.

Image source: Getty Images.

1. Uncertainty drives Starbucks stock price to 52-week low

Starbucks stock is down 35% from its all-time high for a number of reasons — many of which are valid. Investors don’t like uncertainty, and Starbucks gets plenty of it. Howard Schultz is back as interim CEO, but we don’t know for how long. Starbucks has trimmed its share buyback program, and we don’t know the company’s dividend plans. Starbucks has made several price hikes that will be tested if inflation continues to rise. Finally, the union issue is heating up at Starbucks.

However, none of these issues detract from Starbucks’ long-term investment thesis. The company reported record sales in 2021 and the second-highest net profit in its history after 2018. Starbucks remains one of the world’s strongest food and beverage brands and the world’s best-known coffee chain.

The good news is that investors are being compensated for Starbucks’ uncertainty. The stock currently trades at a price-to-earnings (P/E) ratio of just 21.8 — well below its five-year median P/E of 29.8.

It’s also worth noting that while Starbucks has trimmed its buyback program, it hasn’t mentioned any changes to its dividend program just yet. Starbucks has paid and increased its dividend every year since 2011. Given the importance of the dividend and Starbucks’ ample free cash flow, it makes sense that the company would simply end share buybacks to free up capital for the company’s growth — but still pay and increase the dividend. Starbucks has a dividend yield of 2.5%.

2. The leading bank stock is just too cheap to ignore

With a market cap of $386 billion, JPMorgan Chase is the most valuable bank in the US and the third most valuable financial services company behind it Berkshire Hathaway and Visas.

JPMorgan’s stock currently has a P/E ratio of just 8.6. Aside from the brief, pandemic-related stock market crash in spring 2020, JPMorgan’s stock has never traded below 10 times earnings in the last eight years.

JPM P/E chart

JPM P/E data from YCharts.

The stock may look cheap, but comments from CEO Jamie Dimon’s April 4 annual letter to shareholders suggest that both the U.S. economy and banks are facing a lot of headwinds. JPMorgan could face a slowdown in growth — and possibly an extended period of lower return on equity (ROE).

However, JPMorgan has proven through multiple economic downturns that it has staying power. Given the cheap valuation and a 3.1% dividend yield, JPMorgan now looks like a great long-term buy.

3. Home Depot can be a staple stock in a diversified portfolio

Shares of The Home Depot are hovering around a 52-week low — over 25% off their all-time high. Zoom out, however, and Home Depot stock is still well above pre-pandemic levels.

Home Depot has benefited from a surge in do-it-yourself projects during the pandemic, as well as a scorching housing market. However, rising interest rates mean higher mortgage rates, which does not bode well for the future of the housing market. The problem now is that both house prices and Mortgage rates are high, while house prices have been high in 2020 and 2021, but debt has been cheap enough for people to afford new homes anyway.

Combine rising interest rates with inflation, and Home Depot faces stiff competition in 2022. Despite the near-term challenges, Home Depot remains a strong brand and a great dividend stock. Home Depot has never cut its dividend since it paid it in 1987. It would be a Dividend Aristocrat — which it is S&P500 Component, which has paid and increased its dividend for at least 25 straight years, but Home Depot suspended dividend increases during the financial crisis. Home Depot stock has a dividend yield of 2.5% and a P/E of 19.8 compared to a five-year median P/E of 23.3.

Sit back and collect passive income from this diverse trio

By investing equally in Starbucks, JPMorgan, and Home Depot, an investor gets an average dividend yield of 2.7% and exposure to the food and beverage, financial, and home improvement industries. Additionally, an investor can rest assured that no matter what the market throws at them, all three companies are likely to remain relevant and likely to grow much larger in the decades to come.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has the following options: long January 2024 $120 calls on JPMorgan Chase, long January 2024 $70 calls on Starbucks, long January 2024 $80 calls on Starbucks, long January 2024 $90 calls on Starbucks, short January 2024 $100 calls at Starbucks and Short May 2022 $85 on Starbucks. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Home Depot, Starbucks, and Visa. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short April 2022 $100 calls on Starbucks, short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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