5 cheap-as-chips ASX dividend stocks

Australia and New Zealand Banking Group (ASX:ANZ), Woolworths Limited (ASX:WOW), G8 Education Ltd (ASX:GEM), Flight Centre Travel Group Ltd (ASX:FLT) and Rio Tinto Limited (ASX:RIO) look cheap using conventional metrics.

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Historical studies have shown that purchasing shares with a low price-earnings ratio (P/E) has achieved better returns than if you'd purchased 'growth' shares with a high P/E.

Now, I must say, every super stock-picking strategy works – until it doesn't.

That's because investing is part art and not a science to which there is an exact answer or formula.

However, it makes sense to purchase a company's profits or 'earnings' (that is, the 'E' in the P/E ratio) for the lowest price (the 'P') possible.

As an aside, the P/E ratio tells us how many times of last years' profits/earnings we are paying if we bought shares at their current price. For example, if a company had profits/earnings per share of $1.00 and a share price of $20, its P/E is 20x (that is, 20/1 = 20).

Here're five big name ASX-listed companies currently boasting P/E ratios lower than markets, or S&P/ASX 200's (ASX: XJO) (index: ^AXJO) average of around 15x.

Company P/E Ratio Dividend Yield
Australia and New Zealand Banking Group (ASX: ANZ) 11x 6.5% fully franked
Woolworths Limited (ASX: WOW) 13x 5.6% fully franked
G8 Education Ltd (ASX: GEM) 14x 6.6% fully franked
Flight Centre Travel Group Ltd (ASX: FLT) 14x 4.4% fully franked
Rio Tinto Limited (ASX: RIO) 13x 5.4% fully franked
Market (S&P/ASX 200) 14.77x 4.9%

Data sourced from CMC Markets; note: the 'x' simple means 'times' (e.g. ANZ's P/E is 11 times)

Buy, hold or sell

In my opinion the biggest weakness of the P/E ratio – and dividend yield for that matter – is that it is a static measure of value.

For example, Rio Tinto is expected to report a more than 50% fall in profits in the coming year. This will have the impact of pushing down the 'E' in the P/E and, therefore, will result in a much higher P/E ratio than it is today.

So before making any investment decision it's imperative you look beyond the P/E ratio and dividend yield and have a thorough understanding of the business, and its growth outlook, before buying shares.

Of the companies above, I think Flight Centre is the only clear buying opportunity for long-term focused investors, but Woolworths is also very close to being investment worthy.

Motley Fool contributor Owen Raskiewicz has a financial interest in Flight Centre Travel Group Limited, G8 Education Limited, and Woolworths Limited.  Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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