Bear markets can be brutal. It isn't easy to buy when prices seem to just go lower day after day. But history tells us that bear markets present some of the best long-term buying opportunities.
Now is the perfect time to scan the stock market for companies that are worth owning for at least a decade. Caterpillar (CAT 0.38%), Phillips 66 (PSX -1.13%), and Johnson Controls International (JCI 0.55%) stand out as three dividend stocks that can provide a combination of passive income and long-term wealth creation. Here's what makes each a great buy now.
Caterpillar's stable dividend complements its cyclical performance
Daniel Foelber (Caterpillar): Caterpillar is one of the few industrial stocks that is the complete package. It has exposure to oil and gas, power generation, rail, marine transportation, construction, agriculture, forestry, mining, road work, and even the waste management industry. Its reputation is that of an industrial bellwether whose results rise and fall to the beat of the broader economy. But Caterpillar isn't a one-trick pony. And that helps add consistency to its results. This dynamic has been put on display over the last three years.
Caterpillar's construction industry was the star of 2020 and 2021 as the U.S. housing market was white-hot and China's growth remained strong at the time. As oil and gas prices rose in 2021, Caterpillar's energy and transportation segment began picking up speed. And as supply chain constraints lasted longer than expected, demand for raw material production boosted Caterpillar's mining segment. Fast forward to 2022, and the housing market is beginning to weaken. Threats of a recession impact commercial real estate, too. But oil and gas prices are roaring higher. And geopolitical tensions are adding pressure to ramp up domestic production in the agriculture industry.
There's no denying that a full-blown recession hurts Caterpillar a lot more than most companies. But it is a mistake to assume that Caterpillar automatically faces slower growth all because of a weakening construction segment. Rather, Caterpillar is a global company with many different industries. Over half of its sales come from outside of the U.S. And only a few years ago, Caterpillar made more money from energy and transportation than it did from construction.
Thanks to record-high earnings per diluted share in 2021, Caterpillar's price to earnings (P/E) ratio is only 17.2, which is close to its 10-year median of 16.8. Caterpillar stock tends to trade at a discount to the S&P 500's P/E ratio due to the cyclical nature of Caterpillar's results, which make the stock look expensive during low-growth times (like in 2020) and cheap during periods of growth (like in 2021).
On top of its diverse revenue streams, Caterpillar is also a Dividend Aristocrat that has paid and raised its dividend for 27 consecutive years. With a dividend yield of 2.2% and an industry-leading position in many different categories, Caterpillar is a well-rounded industrial stock worth owning over the long term.
Energize your passive income stream with this oil and gas stock
Scott Levine (Phillips 66): There's no way to know for sure what's in store over the next 10 years, but there's one thing that's certain: Buying quality dividend stocks -- like Phillips 66 -- to park in your portfolio for the long haul is a savvy investing move. Besides the chance to benefit from capital appreciation of the stock, the steady stream of passive income can also energize your return. Fortunately for investors, shares of Phillips 66, which currently offer a 4.1% forward dividend yield, are hanging on the discount rack.
Trading at 6.4 times operating cash flow, shares of Phillips 66, a diversified energy and logistics company, are attractively priced considering the company's five-year average cash flow multiple is 10.7. But that's not the only perspective from which the stock seems cheap. Shares are also valued at 10.2 times forward earnings, a steep discount to its five-year average forward earnings ratio of 17.7.
Investors looking in the rearview mirror to inform an opinion about the future possibility of dividends from Phillips 66 will be disappointed. The stock doesn't have a decades-old history -- it was spun off from ConocoPhillips in 2012 -- but management has articulated a firm commitment to rewarding shareholders. On the company's fourth-quarter 2021 conference call, the company's CFO, Kevin Mitchell, stated that its capital allocation plan includes returning 40% of cash to shareholders. More recently, on the first-quarter 2022 conference call, CEO Greg Garland reiterated this approach, stating, "[W]e remain committed to a secure, competitive and growing dividend and plan to resume our cadence of annual dividend increases."
Investors don't have to be singularly focused on leading oil dividend stocks to find Phillips 66 a compelling proposition; both dividend investors writ large and value investors alike will find good reasons to gas up their portfolios with the stock.
The best is yet to come for this building products company
Lee Samaha (Johnson Controls): The recent sell-off in building products company Johnson Control's stock is a buying opportunity. It's also turned the stock into a good option for dividend-seeking investors, with its 2.7% dividend yield providing valuable income.
It's never good news when a company cuts its full-year earnings guidance, and the significant reduction prompted a sell-off. In its fiscal second-quarter earnings presentation, for the period ended March 31, management lowered its full-year adjusted earnings per share (EPS) guidance to $2.95-$3.05 from $3.22-$3.32.
However, some context is needed. The problem isn't a shortage of orders (trailing-three-month orders were up 11%) or a falling backlog (currently at a record $10.9 billion). Instead, Johnson Controls is having difficulty fulfilling orders, particularly higher-margin orders, due to an inadequate supply of semiconductors and other components.
Those issues could prove temporary as the global economy muddles through the supply chain crisis. If they do, indeed, prove temporary, then it's likely that sales and profit margin will expand in 2023.
Meanwhile, the company has a long-term growth opportunity in helping building owners meet their net-zero carbon emission targets using Johnson Controls' smart controls and digital technology. In addition, smart connected buildings generate cost savings through efficiency gains. Finally, the company's heating, ventilation, and air conditioning (HVAC) systems help ensure healthy, clean facilities -- a key consideration in the pandemic's wake. Everything points to a company with a multiyear growth opportunity ahead of it, and that's likely to mean dividend growth for many years to come.