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Income investors typically focused on dividends. However, income investors should also be concerned with generating high total returns over time. Buying stocks that have high total return potential can provide shareholders with capital gains from a rising share price, in addition to dividend income.

These 3 stocks pay dividends but are also undervalued, and have strong total return potential for 2024 and beyond.

CVS Health Corporation (CVS)

CVS Health Corporation is an integrated healthcare services provider that operates a pharmaceutical services business, along with the country’s largest chain of pharmacies. The company operates more than 9,900 retail locations, 1,100 medical clinics, and services more than 102 million plan members. CVS Health Corporation generates annual revenues of about $323 billion

In the 2023 third quarter, revenue increased 10.6% to $89.8 billion. Adjusted earnings-per-share of $2.21 compared to $2.09 in the prior year, and was $0.08 ahead of expectations. Revenues for Health Services, formerly known as Pharmacy Services, improved 8.4% for the quarter, with total pharmacy claims processed declining by 0.9%. Management now expects full-year revenue to range from $351.5 billion to $357.3 billion.

The company has compounded its earnings and dividends at annualized rates of 9.0% and 10.4%, respectively, over the last decade. The dividend growth rate is especially impressive given that the company had frozen its dividend for four years.

We expect CVS to generate adjusted EPS of $8.60 in 2023 and grow its adjusted EPS by 6% per year over the next five years. The stock has a P/E of 8, with a current dividend yield of 3.4%. Total returns are estimated to reach 12.5% annually.

Starbucks Corp. (SBUX)

Starbucks began with a single store in Seattle’s Pike Place Market in 1971 and now has more than 37,000 stores worldwide. Nearly half of the stores are in the U.S. and nearly 20% of the stores are in China. The company operates under the namesake Starbucks brand but also holds the Teavana, Evolution Fresh, and Ethos Water brands in its portfolio.

In early November, Starbucks reported (11/2/23) financial results for the fourth quarter of fiscal year 2023 (Starbucks fiscal year ends the Sunday closest to September 30th). The company maintained its strong business momentum and grew its comparable store sales 8% thanks to 9% growth in North America and 5% growth in international markets. Same-store sales in China grew 5%.

Adjusted earnings-per-share grew 31%, from $0.81 in the prior year’s quarter to $1.06, and exceeded the analysts’ consensus by $0.09. The headwinds from the lockdowns in China and high inflation have subsided.

Starbucks provided strong guidance for fiscal 2024, expecting 10%-12% growth of sales and 15%-20% growth of earnings-per-share, in line with its long-term guidance of 15%-20% growth of the bottom line. We expect 13% annual EPS growth for SBUX.

In addition, the stock has a current dividend yield of 2.4%. Total returns are estimated at 14%-15% annually over the next five years.

Comcast Corp. (CMCSA)

Comcast is a media, entertainment and communications company. Its business units include Cable Communications (High-Speed Internet, Video, Business Services, Voice, Advertising, Wireless), NBCUniversal (Cable Networks, Theme Parks, Broadcast TV, Filmed Entertainment), and Sky, a leading entertainment company in Europe that provides Video, High-speed internet, Voice, and Wireless Phone Services directly to consumers.

Comcast reported its Q3 2023 results on 10/26/23. For the quarter, the company’s revenues climbed 0.9% to $30.12 billion, adjusted EBITDA (a cash flow proxy) rose 5.1% to $9.96 billion, adjusted earnings-per-share (EPS) climbed 12.5% to $1.08. And it generated free cash flow (FCF) of $4.03 billion. The Connectivity & Platforms segment’s revenues rose by 1.1% to $20.27 billion and adjusted EBITDA growth was 3.0% to $8.22 billion.

Future growth is likely for the company. Management sees organic growth opportunities across its businesses, including increasing the capacity of its U.S. broadband network, and producing more premium content that can increase engagement at its Peacock streaming service. From 2012 to 2021, its EPS increased at a compound annual growth rate (CAGR) of 12.3%.

Shares currently yield 2.6%. The stock trades for a 2022 price-to-earnings ratio of ~10, below our fair value P/E of 14. Lastly, we expect the company to grow its EPS by 9% per year over the next five years. Total returns are expected to reach just above 10% per year over the next five years.

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