Dividend stocks provide investors with the possibility to increase long-term wealth by providing a steady stream of income as well as by capital appreciation. In 2020, there were several dividend-paying companies across sectors that lost considerable value due to the COVID-19 pandemic. 

The stock prices of these companies have been driven lower, increasing their dividend yields over the last few months. Investors should note that investing in a company with a high yield carries certain risks. In fact, these stocks have lost investor confidence and are trading at a lower price for multiple reasons. 

However, I believe that the sell-off in some of these dividend stocks is excessive, making them solid investments in 2021.  Here we take a look at three oversold dividend-paying companies that could stage a turnaround next year and generate outsized gains for investors.

Bed Bath and Beyond

The first stock on the list is Bed Bath and Beyond (BBBY), a retail merchandise company. Shares of the company are trading at $18.81 which is 30% below its 52-week high. Bed Bath and Beyond has been impacted in the last two months after investors were left unimpressed as the company decided to remodel its stores, buy back shares, and overhaul its supply chain.

Bed Bath said it will accelerate the repurchase of stocks worth $225 million and announced a 3-year buyback program of $825 million. The company put the buyback program on hold during the pandemic to boost liquidity.

It also announced its plan to close 200 stores by 2021 and generate $100 million in EBITDA savings. Bed Bath has agreed to sell a key asset- Cost Plus World Market to a private equity firm based out of LA.

It’s quite evident that Bed Bath is looking to streamline its portfolio and focus on cost savings right now. In the first nine months of 2020, the company raised $500 million from the sale of non-core assets.

Its focus on improving liquidity suggests Bed Bath is on the road to recovery. The company’s forward dividend yield of 3.7% will sweeten the deal if the stock price appreciates in 2021.

CyrusOne

Another stock that is currently trading at a lower price is real estate investment trust CyrusOne (CONE). This company invests in carrier-neutral data centers and is valued at a market cap of $8.8 billion. CyrusOne stock is trading at $74 which is 15% below its 52-week high, indicating a forward yield of 2.8%.

CyrusOne shares have fallen after its Q3 results where revenue was impacted due to the lumpiness in its hyperscale business and timing of larger deals.

The company however said it leased $107 million in annualized revenue in the first three quarters of 2020 which is higher than the total bookings for 2019. Its revenue backlog remains high at $82 million.

The REIT acquired 33 acres of land in London with a capacity for 100 megawatts giving it plenty of runway in this market. In Q3, CyrusOne also issued $400 million of 10-year notes with a coupon of 2.15%, also improving its liquidity position.

Royal Gold

The final stock on the list is Royal Gold (RGLD), a company that is engaged in acquiring and managing precious metals royalties. Royal Gold stock is trading at $108 which is 27% below its 52-week high and its dividend yield stands at 1.2%.

Gold prices are inversely related to bond yields and the U.S dollar. Interest rates are likely to remain low in the next few years as global economies continue to recover from the pandemic. Further, quantitative easing measures might also result in the weakening of the U.S. dollar driving prices of the yellow metal higher.

It suggests ancillary companies like Royal Gold can gain momentum in 2021. Royal Gold provides mining companies with capital in return for a right to purchase the mining assets at a present price. It may also agree to receive a percentage of mining production in return for capital infusion.

Royal Gold has a diversified mining portfolio with royalty and streaming agreements with multiple mining companies. This allows investors to diversify their risk when compared to investing in just a single mining company.

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BBBY shares were trading at $18.70 per share on Wednesday afternoon, down $0.13 (-0.69%). Year-to-date, BBBY has gained 10.55%, versus a 17.83% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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