Just when investors may have hoped the 2022 stock market sell-off was turning the corner, all three major indices posted sharp losses on Friday, including a 2.47% decline for the Nasdaq Composite.
Week after week of watching screens painted red can be a drag on morale. While we can't control the temperament of Mr. Market, we can control how we structure our portfolios. Investing in quality dividend stocks is one way to boost an investor's spirit during a bear market. Reliable dividend stocks provide income no matter how stock prices are moving, which can come in handy when an investor wants income but doesn't want to sell a stock at the wrong time.
ConocoPhillips (COP 0.39%), Chevron (CVX 0.57%), and United Parcel Service (UPS 2.42%) are three dividend stocks worth buying in June. Here's why.
An oilfield worker checking a pipeline gauge. Image source: Getty Images.
A disciplined oil and gas giant with a growing dividend
Daniel Foelber (ConocoPhillips): Eight-year-high oil and gas prices have given energy companies a much-needed boost. And even though the energy sector has crushed the S&P 500 in 2021 and so far this year, it has still underperformed the market over the past 10 years even when factoring in dividends. And it's not even close.
XLE Total Return Level data by YCharts
The chart goes to show just how beaten down the energy sector was. And because so many oil and gas stocks were undervalued, many still look like reasonable buys even though their stock prices have soared over the past 18 months.
One name worth watching is ConocoPhillips, one of the world's largest upstream oil and gas companies. Unlike integrated majors such as ExxonMobil or Chevron, ConocoPhillips is more of a pure-play company that focuses all of its effort on finding and producing oil and gas for the lowest price and then selling it for the highest price.
ConocoPhillips is very good at what it does, so much so that its portfolio features one of the lowest costs of production in the industry. This cushion gives ConocoPhillips a margin of error when oil and gas prices are low -- an advantage that was put on display in 2020, when ConocoPhillips was one of the few exploration and production companies that was free cash flow positive.
Aside from its resilience during oil and gas downturns, ConocoPhillips is an exciting dividend stock because it recently implemented a variable return of cash (VROC) program on top of its growing original dividend. In early May, the company announced a $0.46-per-share ordinary dividend and a $0.70-per-share VROC for a total quarterly distribution of $1.16 per share. In this vein, ConocoPhillips is giving shareholders a baseline amount of passive income while allowing them to directly benefit from extra cash generated on high margins from its booming business.
A noble way to energize your passive income stream
Scott Levine (Chevron): With markets failing to recover from their recent slides and the fear of a recession looming in the back of their minds, many investors are looking to increase their passive income to fortify their financial positions -- especially with reliable choices like Chevron. A Dividend Aristocrat, Chevron has raised its dividend in consecutive years for nearly four decades, and its stock currently offers investors a 3.3% forward yield. And fortunately for investors, shares are available today on the sale rack.
Taking a peek at its recent stock performance, investors may surmise that now's not a great time to fuel their portfolios with shares of Chevron, as the stock recently hit an all-time high. Moreover, a cursory glance at Chevron's valuation in terms of its cash flow multiple also suggests that the stock isn't that attractive right now. Shares are valued at 10.3 times operating cash flow, slightly above its five-year average cash flow multiple of 10.2. But dig in deeper and take a closer look at the price tag, and the stock seems a lot more alluring. Trading at 12.5 times forward earnings, Chevron's stock is valued at a steep discount to its five-year average multiple of 40.4.
With the price of Brent crude oil hovering around $117 per barrel, Chevron is poised to generate significant cash flow. During a recent investor presentation, for example, the company forecasted growing its operating cash flow (excluding working capital) at a compound annual growth rate of more than 10% from 2021, when it generated cash flow from operations of $12.20 per share, excluding working capital, through 2026 -- guidance based on Brent priced at only $60 per barrel. For investors concerned about the company's ability to sustain its dividend payments, generating strong cash flow is an encouraging sign. From several different perspectives, therefore, Chevron appears to be a compelling stock to scoop up in June.
UPS is ahead of its medium-term plans
Lee Samaha (UPS): The market didn't like UPS's first-quarter earnings report. Even though management reaffirmed its full-year guidance -- an outlook that implies UPS is meeting its 2023 targets a year early -- the market was left unimpressed by a report of weaker-than-expected volume in its two major segments -- U.S. domestic and international package. Both segments reported volume declines, and management told the market that volumes for both would be lower than previously expected in 2022.
While that's not good news, management outlined that it comes down to a difficult comparison in the U.S. with the anniversary of the stimulus checks paid in March 2021 and the lockdowns in China that have hit international volume. The former issue will obviously disappear, and the latter is likely to as well.
Meanwhile, UPS is offsetting lower volumes with price increases (note that full-year guidance was reaffirmed) and progressing on its strategic initiatives. For example, UPS is now offering its highly successful digital access programs internationally and is improving its offering to small and medium-sized businesses in the United States.
While UPS faces the usual headline risk that economically sensitive stocks have to deal with -- i.e., a slowdown in the economy will reduce volume growth -- the stock looks a good value on a risk/reward basis. Trading at around 14 times analyst estimates for earnings in 2022 and sporting a 3.5% dividend yield, UPS looks a good value right now.
