2 Overlooked Dividend Stocks for Investors to Pounce On

Key Points

• Historically, dividend stocks have outperformed non-dividend-paying stocks.

• Colgate is now bringing new products to market much faster than it has historically.

• General Motors is returning massive value to shareholders via share buybacks.

• 10 stocks we like better than Colgate-Palmolive ›

"If you don't find a way to make money while you sleep, you will work until you die."
-- Warren Buffett

There are different ways to make money while you sleep, but this famed investor and soon-to-be-retired CEO of Berkshire Hathaway is likely talking about investing in dividend stocks. These stocks generally represent stable and mature companies that have a consistent excess cash flow and choose to reward investors with a steady quarterly payment.

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There are plenty of obvious choices out there that offer dividends, but if you're hunting for a couple of dividend stocks that investors are overlooking, you're in the right place.

Image source: Getty Images.

Owning the grocery aisle

Despite concerns regarding consumers' financial health and spending, consumer products giant Colgate-Palmolive's (NYSE: CL) portfolio of essential goods should survive the current uncertain economic environment. Further, it's positioned to defend its turf and take market share from rivals with its business strategy focused on increasing research and innovation, marketing spend to back its brands, and responding more quickly to changing consumer preferences.

To take that last point further, Colgate-Palmolive has been working to bring new products to market within just six to 12 months in some cases, faster than it has historically (roughly 18 to 36 months), according to researchers at Morningstar. The strategy has paid off as Colgate-Palmolive managed to notch 24 consecutive quarters that came in at or above its 3% to 5% organic sales growth target (through the end of fiscal 2024).

Image source: Colgate-Palmolive

Colgate has also been working to offset inflation in raw materials by raising prices, employing revenue management initiatives, and improving operational efficiency. There's also potential upside with the company's pet food Hill's business, as increased pet adoption during the pandemic could boost its sales over a longer period of time than initially expected. There could also be lucrative growth in developing countries, as management claimed that its gross margin in emerging markets outpaced that in developed regions.

Ultimately, Colgate offers a stable business with upside, resistance to economic downturns, and consistent organic growth. It also trades at a fair price-to-earnings multiple of 22 times, and dishes out a dividend yielding 2.6%.

Product renaissance pays off for this automaker

Vehicle manufacturing giant General Motors has come far over the past two decades. GM invested heavily in its brands and products and now makes vehicles that consumers desire to purchase, rather than overproducing and selling into rental fleets, which destroyed value for investors.

In fact, GM continues to lead the industry in full-size trucks and SUVs, with the 10 all-new or redesigned crossover SUVs taking big steps forward in design and technology that have driven strong demand and revenue growth. Further, General Motors recently overtook Ford for the No. 2 seller of electric vehicles (EVs) in the U.S. market, trailing only Tesla.

Image source: General Motors.

Detroit's largest automaker also responded quickly to changing tariffs by announcing a new $4 billion investment in its U.S. assembly plants to add 300,000 units of capacity for high-margin light-duty pickups, full-size SUVs, and crossovers. That reduces the company's exposure to tariffs, and the capacity will support upside opportunities with new vehicle launches on the way.

One thing General Motors doesn't get enough credit for is how it returns value to shareholders. While GM offers a modest dividend yield at 1%, that yield is reduced mostly because of the stock price appreciation it has seen over the past two years (up 86%). During that time, it has bought back a substantial chunk of its shares while sitting at low valuations. Despite the price performance, GM stock currently trades at a paltry price-to-earnings ratio of 9.

Data by YCharts.

Should you buy these dividend stocks now?

Both of these companies offer investors intriguing options as dividend stocks. With Colgate, investors get a well-diversified business with a long list of powerful and well-positioned brands that continue to take market share and dominate many areas. With General Motors, you're getting a company operating better now than it has in a long time, and you're also getting a company returning massive value to shareholders buying back stock while it trades in the single-digit valuations. Both are compelling options for investors looking for overlooked dividend stocks.

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Daniel Miller has positions in General Motors. The Motley Fool has positions in and recommends Berkshire Hathaway, Colgate-Palmolive, and Tesla. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.