The last five years have featured three distinct stock market sell-offs. In late 2018, it was the U.S.-China trade war and an uncertain Fed policy that sparked a rapid sell-off. In 2020 it was the COVID-19 pandemic. And in 2022 it was inflation, rising interest rates, supply chain disruptions, and geopolitical concerns.
Entering the last third of 2023, there's a great deal of uncertainty in the stock market. Many issues that contributed to last year's sell-off haven't gone away, and in fact have arguably gotten worse.
If you've been through a brutal sell-off before, you may be familiar with the calming presence a quality dividend stock can bring when the market is crashing around you. The calm can come from steady dividend payments that provide passive income without the need to sell stock. But it can also come from lower volatility, as quality dividend names with stable business models can often outperform the broader stock market during a sell-off. This one-two punch of capital preservation and passive income can help you rest easy at night, even during a bear market.
Here's why American Electric Power (AEP -1.84%), Dominion Energy (D -1.02%), and RTX (RTX -0.29%) are three dividend stocks worth considering now.
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Power your passive income with American Electric Power
Scott Levine (American Electric Power): The market has performed well so far in 2023, but there are valid concerns that stocks could be headed lower in the near term. To help stave off sleepless nights that might occur during a market downturn, investors can charge up their passive income with the 4.1% forward dividend yield of American Electric Power, one of the largest electric utilities operating in the United States.
Utility stocks like American Electric Power often appear on the radars of recession-wary investors because their businesses are resilient. Discretionary spending may drop, but the company's 5.6 million customers are hardly likely to eschew electricity during a market downturn.
American Electric Power has demonstrated steadfast dedication to the dividend, returning capital to shareholders with a distribution for 112 years. That's no small feat, and it illustrates the robust nature of American Electric Power's business to withstand challenging macroeconomic conditions. Should the company achieve its target of returning $3.37 to shareholders via the dividend in 2023, it will mean the company has raised the payout at a compound annual growth rate of 5.4% since 2010. In the coming years, management hopes to hike the dividend higher at an even steeper rate, targeting annual increases of 6% to 7%.
Dominion Energy stock has fallen far enough
Daniel Foelber (Dominion Energy): Dominion Energy investors have not had a good time lately. The utility sector as a whole has been selling off. But Dominion, down over 40% in the last year, is in a league of its own.
The company has made some dramatic moves over the last few years, uncharacteristic of a "boring" utility business. Worst of all, it hasn't communicated its intentions well, and many of these moves have caught investors off guard.
The general theme is that Dominion is transitioning from a natural gas and electric utility business -- with the bulk of its electricity mostly produced from natural gas -- to an electric utility looking to produce the bulk of its electricity from renewable energy. It's not a bad idea, and it could pay off over the long term. But Dominion's timing has been awful. It sold natural gas pipeline assets to Berkshire Hathaway in 2020, and the oil and gas industry has recovered nicely since then. It's also accelerating renewable energy investments during a weak time in that industry.
Investors have been selling off solar and wind energy stocks partly because the return on investment of capital-intensive projects isn't as good when interest rates are high. A regulated electric utility like Dominion isn't in the same camp as a renewable energy equipment company. But the fact of the matter is that Dominion is actively selling proven assets that generate strong cash flows, and investing in a largely unproven U.S. offshore wind energy that will have a hard time producing electricity for the same cost as a natural gas-fired power plant.
So what makes Dominion a stock that should hold up during a stock market sell-off? For starters, Dominion stock has been crushed. This isn't to say it couldn't sell off more, but Dominion has just a 15.1 forward price to earnings ratio. Investor sentiment is already very low as well. The sell-off in Dominion stock has pushed the dividend yield up to a sizable 5.6%, which is a major incentive for investors to hold the stock. Dominion's business isn't correlated with the broader economy either. So during a stock market sell-off, Dominion and its attractive yield could easily produce a total return that's higher than that of the market.
Dominion has a lot to prove to investors who are disappointed in the stock's performance and are desperately seeking clarity on the company's overarching strategy. But given the extent of the sell-off and the nature of Dominion's business, it's a good stock to consider if you're looking for passive income.
RTX's growth prospects are mainly dependent on self-help
Lee Samaha (RTX): To be clear, I don't think the aerospace & defense stock is a buy right now. However, it is the stock investors should look at buying if there's a heavy sell-off in the market. The reasoning is that its end markets remain attractive. The commercial aerospace industry continues to build on a recovery from the devastation wrought upon it due to travel restrictions imposed on the populace. Meanwhile, there's solid demand for defense spending amid geopolitical conflict and growing tension.
There's nothing wrong with RTX's end market demand. Instead, the company's problems relate to $3 billion in costs it's facing thanks to the need to remove and inspect its airplane engines in 2023-2025. In addition, its defense businesses are suffering ongoing supply chain issues (impacting parts availability) that are pressuring margins.
While these issues are pressuring earnings and cash flow, they are both issues that are likely to be resolved over time. RTX will work its way through the engine inspections, and the supply chain issues in defense are already easing. Meanwhile, the $3.2 billion in dividends paid are easily covered by an estimated free cash flow of $4.3 billion in 2023, leading to $7.5 billion in 2025.
All told, RTX's dividend (currently yielding 3.1%) is well covered, and if the market dips substantially and takes RTX with it, then the stock is worth a look. Its end markets remain buoyant, and the factors that will move the needle on its stock price are primarily in the company's own hands.
