Before hunting for dividend stocks with low PEG ratios, investors must first understand exactly what that ratio is. PEG stands for price-to-earnings growth and is derived by dividing a stock's price-to-earnings ratio by the growth rate of earnings over a specific time frame. A low PEG ratio could be a sign that a stock is undervalued, allowing investors to get a good deal before the shares pop. Typically, a low PEG ratio is less than 1.
Set Up A Screen
An effective way for investors to unearth low PEG ratio dividend stocks is to use a stock screener, many of which are available for free on the Internet. From there, investors can set their own parameters when searching for stocks, but remember that a "low" PEG ratio is less than 1. An example of screen parameters that beginners might find useful is the following: PEG ratio less than 1, large-cap stocks and a dividend yield of more than 2 percent.
Hunt By Sector
Investors can pare the screen results further or make the process of hunting for low PEG dividend stocks more efficient from the outset by seeking candidates on a sector-by-sector basis. That may sound like a daunting task, but it is not. Here is why. Since it has been established that a low PEG ratio can be a trait of a value stock, investors merely need to isolate which sectors are known for being home to ample amounts of value stocks. Factor in the dividend component, and the search becomes even easier because not all sectors will meet the criteria of having both stocks that are good values and ones that pay dividends.
There are several industry groups and sub-sectors that are chock full of low PEG ratio stocks that also pay solid dividends. For example, in the financial services sector, some traditional money center banks fit the bill, but investors can find comparable PEG ratios and higher dividend yields with mortgage real estate investment trusts. The technology sector is fertile ground for favorable PEG ratio dividend stocks, but in this case investors will want to focus on older, cash-rich tech companies. Many "new tech" firms either sport high PEG ratios, do not pay dividends or both. Other winning sectors for dividend stocks with low PEG ratios include consumer staples, discretionary and telecommunications, according to data from Finviz.com
Consider Foreign Stocks
Experienced dividend investors know that many foreign stocks pay better dividends than their U.S. counterparts. For example, the largest European oil companies frequently have higher yields and payouts than their U.S. rivals. Taking that thought process a step further, investors can find a fair amount of developed market low PEG ratio dividend stocks in the following groups: Money center banks, energy, shipping and telecommunications, as Finviz data highlights.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.