3 Cheap Dividend Payers From the Ultimate Stock-Pickers

Our quarterly series, Ultimate Stock-Pickers, culls investment ideas from the most recent transactions of some of our favorite investment managers. While the vast majority of our Ultimate Stock-Pickers are not dividend investors, a handful of them focus more heavily on income-producing stocks in their pursuit of investment return. To get to a list of buy ideas, we've screened for stocks with a wide or narrow economic moat and an uncertainty rating of low or medium.

One of the stocks that passes the test and is also undervalued according to our measures includes cigarette maker Philip Morris. This stock is currently trading at almost a 30% discount to our fair value estimate of $102, which implies a forward 2020 multiple of 18 times earnings per share and a dividend yield of 5%. Philip Morris has received a lot of negative press recently after announcing that it is in talks to merge back with Altria (which had completely spun off its international tobacco operations during 2008). We think that this potential deal makes a lot of strategic sense.

In addition, two large drug manufacturers, Pfizer and Gilead Sciences, make the list. Wide-moat Pfizer is rated 5 stars and carries a low uncertainty rating. We think that economies of scale, patents, and a powerful distribution network should allow the company to earn an economic profit for years to come. Gilead Sciences has also carved out a wide economic moat and trades in 4-star range with a medium uncertainty rating. Patent protection on Gilead's newer HIV regimens and continued dominance in the hepatitis C market will be enough to ensure strong returns for the next couple of decades.

We think long-term investors should consider these names.