2 Cheap Dividend Stocks to Boost Your Passive Income

Investing in cheap dividend stocks such as Headwater Exploration should help you beat the markets in 2024 and beyond.

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Investing in cheap dividend stocks will help you benefit from a steady income stream as well as capital gains. Ideally, these dividend-paying companies should increase their payouts regularly, which enhances the effective yield over time. Here, I have identified two cheap dividend stocks you can buy to boost your passive income in 2024.

Hammond Power Solutions stock

Valued at $1.23 billion by market cap, Hammond Power (TSX:HPS.A) pays shareholders an annual dividend of $1.1 per share, indicating a yield of just 1.1%. However, these payouts have risen by 16.5% annually in the last decade.

Hammond Power designs, manufactures, and sells transformers in North America and India. These include electrical magnetics, cast resin, custom liquid-filled distribution and power transformers, and standard electrical transformers for industries.

Hammond Power has already generated massive wealth for shareholders, rising over 1,240% in the last five years, but continues to trade at a compelling valuation in 2024.

In the first quarter (Q1) of 2024, Hammond Power reported revenue of $190 million, up 11.4% year over year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $31 million, indicating a margin of 16%.

Higher bookings allowed Hammond Power to maintain a robust backlog amid higher shipments in the March quarter. The company attributed Canada as being a key driver of demand, as it shipped key projects in commercial construction, oil and gas, mining, and utilities.

Due to strong demand from these verticals and emerging markets, Hammond Power continues to invest in capital expenditures. It also implemented a price increase for the first time since 2022 due to inflation and resilient demand.

Analysts tracking Hammond Power stock expect sales to rise from $710 million in 2023 to $847 million in 2025. Its adjusted earnings per share are forecast to expand from $5.33 per share to $6.82 per share in this period. Priced at 15.3 times forward earnings, Hammond Power Solutions stock is cheap and trades at a discount of 57% to consensus price target estimates.

Headwater Exploration stock

Valued at $1.75 billion by market cap, Headwater Exploration (TSX:HWX) pays shareholders an annual dividend of $0.40 per share, which translates to a forward yield of 5.4%. The company is engaged in the exploration, development, and production of petroleum and natural gas in Canada.

In Q1 of 2024, Headwater Exploration’s production averaged 19,517 boe/d (barrels of oil equivalent per day), an increase of 15% year over year. Its adjusted funds flow from operations stood at $76.4 million or $0.32 per share. Comparatively, Headwater spent $65.2 million in capital expenditures and paid $23.7 million to shareholders via dividends, indicating a payout ratio of over 100%.

However, Headwater’s growth story is far from over, as its exploration program in Q1 added 1.5 years to its existing long-term depth of drilling inventory. Headwater expects to end 2024 with adjusted funds flow from operations of $319 million, while capital expenditures are forecast at $200 million, indicating a payout ratio of less than 80%.

Priced at nine times forward earnings, Headwater stock is really cheap and trades at a discount of 28% to consensus price estimates.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Hammond Power Solutions. The Motley Fool has a disclosure policy.

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