Buying oversold dividend stocks can be a lucrative investment strategy. Not only can investors profit from the dividends but they can also possibly benefit from substantial share price gains.
Here, I’m going to highlight two dividend shares currently in oversold territory. From a long-term investment perspective, I think they look interesting right now.
What does oversold mean?
Before I discuss the two stocks, it’s worth explaining what the term ‘oversold’ means. Often, investors use it to describe stocks that have experienced large share price falls. And that’s fine.
However, the technical definition of an oversold stock is one that has a ‘relative strength index’ (RSI) of less than 30.
The RSI is a technical indicator that measures the magnitude of recent share price movements. It’s this definition that I’ll be using here.
A high-quality stock
Moving on to the stocks, first up is US-listed coffee giant Starbucks (NASDAQ: SBUX). Down about 20% this year, it currently has an RSI of 22.
Now, this stock’s historically been an excellent long-term investment. However recently, the company has experienced a slowdown in sales in the US and China, sending its share price down.
But I believe the company has the ability to return to growth. Faster service and more promotions could help to turn things around. As could an improvement of its stores.
After the recent share price fall, Starbucks shares trade on a forward-looking P/E ratio of about 18.
That’s not a super-low earnings multiple. But for a company with a powerful brand, a very high return on capital, and an excellent dividend growth track record (over the last 13 years the dividend has grown by around 20% a year), I’d argue it’s quite attractive. The stock’s yield is currently about 3.2%.
Of course, there could potentially be further share price weakness ahead. Especially if economic conditions in China remain weak.
It’s worth noting that an oversold stock can remain oversold for a while. It can even get more oversold. Taking a long-term view, however, I think this stock has considerable potential.
A beaten-up chip stock
The other stock I want to highlight is semiconductor powerhouse Intel (NASDAQ: INTC), which is also listed in the US.
Down nearly 40% this year, it currently has an RSI of 23.
Now, most semiconductor stocks have performed well recently. Not Intel though. It has suffered due to the fact that the artificial intelligence (AI) boom has diverted spending away from the group towards companies that produce AI chips, like Nvidia and AMD.
Losses in the company’s foundry (chip manufacturing) business have also spooked investors.
I see the potential for a rebound, however. Recently, Intel launched its own chip for AI (the ‘Gaudi 3’).
Meanwhile, CEO Pat Gelsinger has said operating losses for the foundry business will peak this year.
I’ll point out that I don’t expect the chip stock to rebound in the short term. Ultimately, it’s going to take a few years for Intel to get its growth and profits up.
Issues such as US government export restrictions could put further pressure on growth in the near term.
Taking a five-year view however, I think the stock – which currently trades at 15 times next year’s earnings forecast and yields about 2% – could produce decent returns.
