Towards the end of 2021, Nvidia (NASDAQ:NVDA) stock was trading at $300. NVDA stock corrected to lows of $108 by October 2022 before skyrocketing by more than 200% for year-to-date. The point I want to make is that the rally in blue-chip stock can be stellar from oversold levels. It does not take time for the market to identify and close the valuation gap. While the markets have trended higher in the last few quarters, there are several blue-chip high-yield stocks that trade at a significant valuation gap.
While these stocks have robust fundamentals and cash flows, these trade at a forward price-earnings ratio of 10 or lower. In general, the outlook for the markets is positive and several stocks trade at stretched valuations. As markets look for value, these stocks will be in the limelight. I believe that it’s a good time to accumulate these high-yield stocks for healthy total returns in the next 12 to 24 months.
Let’s discuss the reasons to be bullish on these blue-chip stocks.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) stock has traded sideways for the last 12 months. A breakout on the upside seems imminent for this 5.78% dividend yield stock. My view is underscored by the point that RIO stock trades at a forward price-earnings ratio of 7.7.
An important point to note is that even with some softness in commodity prices, Rio generated operating cash flow of $7 billion for the first half of 2023. This provides the company with high financial flexibility for dividend and capital investments.
Another key point is that the iron ore business is the cash cow for Rio Tinto. However, the company is investing in copper and lithium mines, among others. The objective is to diversify towards metals that are likely to benefit from the global energy transition. With the Jadar lithium project, the company expects to be the largest source of lithium supply to Europe for the next 15 years.
The decline for Pfizer (NYSE:PFE) stock has been unabated in the last few quarters. The market seems to have overreacted to growth concerns and PFE stock looks attractive at a forward price-earnings ratio of 10. Besides the valuation gap providing scope for upside, PFE stock offers an attractive dividend yield of 4.79%.
From a growth perspective, there are two points to note. First, Pfizer is investing in the launch of new molecular entities. With a deep pipeline of candidates and aggressive investment in research and development, the outlook is positive. Pfizer expects $20 billion in incremental revenue by 2030 from new molecular entities.
Further, Pfizer is utilizing the windfall profits from the sale of Covid-19 vaccine for inorganic growth. The company has already pursued multiple acquisitions and expects $25 billion in incremental revenue from new business developments by 2030.
Given these factors, it’s a good time to accumulate PFE stock. Once sentiments reverse, the rally is likely to be meaningful.
British American Tobacco (BTI)
British American Tobacco (NYSE:BTI) stock has declined by 19% in the last 12 months. I believe that the 8.49% dividend yield stock is trading at a significant valuation gap. My view is backed by the point that BTI stock trades at a forward price-earnings ratio of 7.4.
In recent news, British American tobacco sold its Russian business. The sale of asset has impacted the company’s 2022 numbers by $764 million. However, it’s worth noting that the sale was due since the escalation of geopolitical tensions in the region. The factor is therefore discounted in BTI stock.
A potential stock upside catalyst is the company’s business transformation towards non-combustion products. Last year, British American new category revenue increased by 41%.
Further, the company reported 22.5 million consumers for its non-combustible products. Of course, the smokable segment remains the cash cow. However, cash flows are being successfully deployed to boost growth in the non-combustible segment. This and the other entries on this list are some of the best high-yield stocks on the market.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.