Today, I am discussing six cheap dividend stocks that are worth buying in July. This is because the company’s underlying earnings more than cover the dividend payments. That makes their dividends more secure, and therefore, increases the valuation of the stocks.

Moreover, these dividend stocks might be considered cheap if their yields are higher than their average over a four or five-year period. That is one way that an investor can assume that the stock will eventually return to its normal yield.

Lastly, some dividend stocks are cheap if the earnings of the company are growing nicely, or the company produces large amounts of free cash flow. If it uses the cash flow to buy back shares, then the dividend per share (DPS) can rise over time with the same dividend cost. That is because the dividend money is spread over a fewer number of shares, effectively raising the DPS amount.

So, with all of this in mind, let’s dive in and look at these six cheap dividend stocks for investors to keep their eyes on.

Cheap Dividend Stocks: Lowe’s (LOW)

Lowes’s (NYSE:LOW), the home improvement retailer, just raised its dividend by 31.25% from 80 cents per quarter to $1 in May, putting it on a forward dividend yield of 2.35%. With that, the company said it was due to the strength of its cash flow.

For example, in the last year, its free cash flow (FCF) was $6.835 billion, or 7.2% of its $95.5 billion in sales for the past year to the first quarter of 2022. That was more than enough to pay for the $2 billion costs of its dividends. So, its dividend hike is easily affordable.

Moreover, Lowe’s spent $4.1 billion on buybacks in Q1 and expects to do $12 billion according to its Q1 earnings release. That represents 10.6% of its market value in one year. It will have a huge effect on the stock price and the growth in the dividend per share. For example, if it reduces its share count by 10% in the year, it can afford to raise the dividend by that amount for the same cost of the dividend to the company.

In addition, LOW stock is cheap at just 13.3 times this year’s forecast earnings and 122.1 times next year’s. That assumes earnings grow by 9% according to the average of 29 analysts. This also means Lowe’s can afford to pay its higher dividend and makes this one of the cheap dividend stocks to buy.

Cigna (CI)

After 17 years of paying minimal dividends, in 2021 Cigna (NYSE:CI) started paying a substantial dividend. In 2021 it raised the dividend from pennies to $4.00 per share. It raised the dividend per share (DPS) by 12% to $4.48 annually starting in 2022. Now, CI stock yields 1.65% and it is likely to keep raising the dividend annually with its huge free cash flow.

The company has sold off its international operations and expects to produce $8.25 billion in free cash flow (or FCF) this year alone. Moreover, Cigna is now buying back large amounts of its stock. It spent $1.8 billion year to day (or YTD) through May 5 on buybacks. That puts it on a run rate of buying back over $5.4 billion annually.

That could mean it will raise its dividend per share annually, both from its FCF growth and the reduction in the share count from buybacks. This makes it one of the best cheap dividend stocks going forward.

Cheap Dividend Stocks: Oracle (ORCL)

Oracle Corp (NYSE:ORCL) is overdue for a dividend raise after having paid the same quarterly dividend of 32 cents for the past six quarters. In the past, it never paid the same dividend past eight quarters.

That could end up increasing its dividend yield, presently at 1.79% annually.

In addition, Oracle is buying back large amounts of its shares — despite being at a lower rate than in the past. Last quarter, it spent $600 million on share repurchases, and it looks to do the same for the next year. That $2.4 billion run rate of buybacks works out to 1.27% of its $189 billion market capitalization. This brings the total yield to over 3% for shareholders, including the dividend yield and buyback yield.

Bank of America (BAC)

Bank of America (NYSE:BAC) is due to announce another dividend increase sometime this month. This is because the bank has paid out four quarters at 21 cents per share. It usually raises the dividend after four quarters at the same level.

Right now, BAC has a dividend yield of 2.64% with its 84 cents annual dividend. Assuming it rises to 95 cents, the yield will rise to close to 3%. This could become a major catalyst for the stock in the short term.

Moreover, BAC is spending heavily on share buybacks, including $2.65 billion in Q1 alone, about one-third of its normalized cash flow. In turn, that allows the bank to raise dividends on a per-share basis. It also makes sense as the bank’s valuation is now very inexpensive.

For example, analysts forecast earnings will rise 17% next year, putting BAC stock on a forward price-earnings (or P/E) multiple of just 8.1 times. That is significantly below its five-year average multiple of 12.2 times. This shows that BAC is one of the top cheap dividend stocks on this list.

Cheap Dividend Stocks: HCA Healthcare (HCA)

HCA Healthcare (NYSE:HCA) raised its dividend two quarters ago and is likely to do so again early next year. This puts the stock, with its $2.08 annual dividend rate on a dividend yield of 1.20%.

That is well over its average yield of 0.85% over the past five years. So, for example, this implies that the stock could rise by 41.3% to $244.71. This is seen by dividing the $2.08 dividend per share by 0.85%. The answer is $244.71 as the target price.

Moreover, this huge general and acute care hospital operator is conducting a massive share buyback operation. Last quarter alone it spent $2.1 billion on share buybacks, an annual run-rate of $8.4 billion. That works out to 16.3% of its $51.7 billion market valuation.

This could easily lead the company to be able to raise its dividend per share by 15% or higher next year from the share buybacks alone. That could act as a major catalyst for the stock.

Dollar General (DG)

Dollar General (NYSE:DG) raised its dividend by over 30% this year to $2.20 annually up from $1.68 last year. It is likely to move the dividend higher again at the beginning of next year.

One reason for this is that earnings are forecast to grow 9.5% in 2023 to $12.64 per share. That more than covers the $2.20 dividend and leaves plenty of room to reinvest back in the business of its discount retail stores.

Moreover, the company is spending heavily on share buybacks as well. For example, last quarter it repurchased $746.8 million of common stock shares. That puts it on a run rate to buy back almost $3 billion ($2.987 b) over the next 12 months. That represents 5.34% of its market valuation.

As a result, the dividend could easily rise 5% just from this reduction in share count alone. That does not include any additional gain in the dividend from earnings growth or a higher payout ratio. So investors should expect to see the stock move higher over the year as investors realize that management is on their side returning capital.

On the date of publication, Mark Hake 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.