When the market turns turbulent, dividend stocks can offer shelter from the storm. And even in times when conditions are unabashedly bullish, there's plenty to like about being able to generate substantial passive income just by holding a company's shares in your portfolio. However, you don't have to give up on stocks that are also capable of delivering big pricing increases just because you're seeking stocks that pay reliable dividends.
With volatility roiling the market recently, there are now some great growth stocks trading at beaten-down valuations that also pay substantial dividends. Read on to see why a panel of Motley Fool contributors identified ASML Holding (ASML -2.08%), Regions Financial (RF -0.33%), and Starbucks (SBUX 0.26%) as top companies in that category that are worth investing in right now.
Get paid to invest in the future of semiconductors
Keith Noonan (ASML Holding): Demand for semiconductors has never been higher, but supply chain issues and risk factors in the stock market at large have generally caused investors to sell out of companies with growth-dependent valuations. ASML Holding provides essential lithography machines used by chip manufacturers, and it stands out as a top pick-and-shovel play for benefiting from the industry's long-term growth.
Chip fabricators including Taiwan Semiconductor Manufacturing, Intel, and Samsung rely on ASML's lithography machines in order to make semiconductors. The equipment specialist already has more demand than it can meet, and it's going to play a big role in creating the hardware needed to power next-generation technologies.
With a yield of roughly 1%, ASML's payout might not look like much right now. However, the company has been increasing its dividend at a rapid clip and doubled its payout last year. With what looks to be a near unshakeable position in the semiconductor equipment space and an incredible long-term demand outlook for chips, it's worth pouncing on this category leader.
The stock is now down 23% over the last year of trading and 31.5% from the lifetime high that it hit last September. With shares trading at roughly 35 times this year's expected earnings, it might still be hard to describe ASML as "dirt cheap" by traditional valuation standards, but that descriptor has to be viewed in the context of the individual strengths and growth outlooks of businesses. This industry leader has stellar competitive positioning, and the combination of strong gross margins and a long runway for sales expansion put it on track to deliver impressive capital appreciation and dividend growth.
Growth is relative
James Brumley (Regions Financial): This is gonna sound kind of crazy given the industry it's in, but I like regional bank Regions Financial here.
The banking industry typically isn't a business associated with big-time growth, and it's not like Regions is dishing out tech-like comps. On a relative, risk-adjusted basis, though, there's a lot to like with this prospect.
Regions is currently the country's 24th biggest bank, boasting only $162 billion in assets. The company's using this small size and nimbleness, however, to do what its bigger rivals can't. So, while this year's projected revenue growth of 5% isn't a tech-like growth pace, it's notably better than most banks' expected growth this year. Next year's sales are expected to grow by an even better 6%, with earnings likely to improve even more. Those profits readily support a dividend that's currently almost twice what it was just five years back. This company is clearly serious about letting shareholders share in its success!
Given all of this, it's surprising the market's let this stock linger at its current price-to-earnings ratio of 8.3. Even more surprising is that the market's allowed the dividend yield to ratchet up to 3.1% in an environment that's been marked by ultra-low interest rates.
The global coffee market is evolving
Daniel Foelber (Starbucks): When investors think about prospective passive income vehicles, growth stocks typically don't come to mind. And although Starbucks is long removed from its phase of rapid store expansion and new inroads in emerging markets, its business is far from saturated.
Despite its global presence, Starbucks generates about 75% of its operating profit in North America. The majority of its international stores are licensed stores, not corporate stores. Licensed stores are less capital intensive and tend to have a higher operating margin. The potential for Starbucks to open more licensed stores in Latin America, Asia, and Africa is high. And even in North America, there are still a lot of communities, especially in the suburbs, that would be good locations for a Starbucks store.
Starbucks got its start trying to spread the coffee house culture to areas where it was nonexistent. That isn't really the case anymore, as local coffee shops in metropolitan areas are known to have excellent espresso and probably even source their beans from a local roaster. But unlike the competition between craft breweries and commercial breweries, Starbucks isn't just competing directly with coffee houses for who has the better coffee. A lot of it comes down to speed, convenience, and ease of use. And the success of Starbucks Rewards and its mobile ordering speaks for itself. Over half of Starbucks orders are placed by rewards members, and over 70% of transactions occur via mobile orders or the drive-thru. So instead of visualizing Starbucks' growth trajectory based on its store count, it can be helpful to think about the possibilities that can come from leaning into grab-and-go ordering and opening more licensed stores around the world.
Starbucks also generates tons of free cash flow to support its dividend. Starbucks has a free cash flow yield of 4.8% and a dividend yield of 2.5% -- meaning it generates almost twice as much free cash flow as it distributes through dividends. This is a sign that the business can easily afford the dividend while also retaining some dry powder for reinvesting, paying down debt, or other uses.