Stocks to buy

While there are plenty of highly popular dividend stocks out there to choose from, sometimes the best opportunities are found where few others are looking. This is because less attention in the dividend investing community can result in greater inefficiency in pricing. This often yields compelling buying opportunities.

Popular dividend stocks are often popular for a reason: they generate consistent dividend growth and have generated impressive total returns for shareholders. However, looking  for under-the-radar stocks can often yield opportunities with superior dividend yields and even the possibility for outsized total returns.

In this article, we will cover three under the radar high dividend stocks that combine attractive long-term total return potential with current dividend yields over 6%.

The Western Union Company (WU)

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The Western Union Company (NYSE:WU) is a global leader in domestic and international money transfers. It boasts a network of approximately 550,000 agents in over 200 countries. The company operates in three business segments, with the majority of revenue coming from consumer-to-consumer transfers. In 2019, Western Union divested its Speedpay and Paymap businesses. The company generated approximately $4.5 billion in revenue in fiscal 2022.

Western Union has a competitive advantage in the C2C business and a strong network of agents for transaction processing. It has also partnered with Walmart (NYSE:WMT) and has digital money transfer efforts. However, new online competitors are entering the market, which may negatively affect Western Union’s C2C business through lower volumes.

Western Union’s C2C business is mature but profitable, with a volatile top line due to acquisitions and divestitures. Earnings per share have benefited from significant share buybacks, but revenue and earnings have been negatively impacted by Covid-19 and competition, resulting in a decline in earnings per share. Digital money transfer has been growing rapidly. However, it is expected to level off, with revenue from it accounting for 25% of total C2C revenue. The dividend will likely remain constant with no growth out to 2028.

With an 8.5% dividend yield, a forecasted 0% earnings per share compound annual growth rate (CAGR), and a probable 5.5% annualized tailwind from valuation multiple expansion, WU could deliver exceptional 14% annualized total returns over the next half decade.

Antero Midstream Corporation (AM)

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Antero Midstream (NYSE:AM) is a midstream company that may be considered small in comparison to larger industry players. Its pipeline network spans just a few hundred miles with a sole client in Antero Resources (AR). Nevertheless, its assets boast a multi-decade production profile that provides stability, and it shares a strong economic alignment with AR, providing reassurance to shareholders. Furthermore, AR is making quick progress in reducing its debt. It is also poised to attain an investment-grade credit rating from S&P, which will greatly enhance AM’s risk profile.

AM is focused on paying down debt aggressively as its growth capex declines and new projects come online, resulting in strong free cash flow. It aims to achieve credit-rating upgrades, target a 3x leverage in 2024, and consider growing its dividend per share or buy back shares. With no debt maturing before 2026, AM is in a good position to deleverage and create long-term shareholder value.

AM has indicated to investors that it won’t increase its dividend this year and maybe not next year. This is because it anticipates reaching its long-term leverage target only by the end of 2024. However, with the dividend covered 1.69x by distributable cash flow in 2023 and an expected increase in discounted cash flow (DCF) per share due to interest expense reduction and organic growth, the dividend may see significant growth once the leverage target is met.

With an 8.6% dividend yield, a forecasted -2.6% earnings per share CAGR, and an expected 0.5% annualized headwind from valuation multiple contraction, AM is poised to deliver mediocre 5.5% annualized total returns over the next half decade. However, its dividend is very attractive and looks quite safe at the moment.

Xerox (XRX)

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Xerox (NASDAQ:XRX) is a workplace technology company founded over a century ago. It offers business solutions such as printers, digital services for workflow automation and content management solutions. It has diversified over time by adding software and services segments through organic expansion and acquisitions. In fact, non-equipment revenues now contribute to the majority of its sales. The company is headquartered in Norwalk, Connecticut.

Although Xerox is not in a fast-growing industry, it should deliver meaningful EPS growth over the next five years. Its margins will likely expand due to inflationary pressures easing and the company raising prices for customers. Sales are not expected to grow dramatically, as most of its sales come from existing customers. Xerox can return most of its cash flows to its owners through dividends and share repurchases since it does not need to invest heavily in new production capacity. Share repurchases have reduced the company’s share count, almost doubling each share’s portion of the company’s net profits.

Xerox’s healthy balance sheet with no net core debt enables meaningful shareholder returns. And the company is expected to deliver up to 9% EPS growth annually through margin normalization and buybacks. EPS will likely increase to $2 by 2028.

Xerox operates in a slow-growing industry with established players, including Xerox itself, controlling the market. Xerox has the advantage of a globally diversified customer base and a focus on document management systems. Its healthy balance sheet is also a competitive advantage. However, Xerox has not fully capitalized on these advantages. Its margins and return on capital are not particularly attractive, and its operating margin is only in the mid-single digits.

With a 6.95% dividend yield, a forecasted 9% earnings per share CAGR, and an expected 2% annualized headwind from valuation multiple contraction, XRX is poised to deliver attractive 13.95% annualized total returns over the next half decade along with a very attractive dividend.

On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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