Bear markets are challenging times for investors. However, those challenges can create unique opportunities.
One benefit of a bear market is that dividend yields move in an inverse relationship with stock prices. Because of that, when share prices have tanked, income-focused investors can scoop up some particularly lucrative income streams. And in the views of three of our contributors, the current Wall Street downturn has made Honeywell (HON -0.03%), Phillips 66 (PSX 1.19%), and Energy Transfer (ET 2.32%) into even more appealing dividend stock opportunities.
Take the long view with this industrial powerhouse
Reuben Gregg Brewer (Honeywell): One of the best methods for a small investor to pick stocks is to look for historically well-run companies that have fallen on hard times. Industrial giant Honeywell, down around 20% from its mid-2021 high, seems to fit this description. A good portion of its drop has come during the 2022 bear market. But investors who buy its shares now can collect a dividend that, at the current stock price, yields 2.1%. And its payouts are backed by more than a decade of annual increases, which makes Honeywell a Dividend Achiever.
The $120 billion market cap industrial is one of the largest global players in its space. Its four divisions are aerospace, building technologies, performance materials and technologies, and safety and productivity solutions. Despite the current headwinds, notably including inflation and supply chain headaches, each of these business units had double-digit percentage operating margins in the first quarter. Overall, organic sales were up 1%, though that would have been 3% if not for the drop-off in sales of masks used to protect against the coronavirus. The stock is down, but this is definitely not a company that is struggling to survive.
Equally important is that Honeywell has a $28.5 billion backlog, up 9% year over year. That is work still to be done that can help carry the company through an economic downturn, should one materialize. So, even in the worst-case economic scenario, Honeywell looks well-positioned. If you are a long-term investor, now would be a good time to start digging into this industry-leading industrial name.
The refining giant's dividend yield is on the rise
Matt DiLallo (Phillips 66): Shares of refining giant Phillips 66 have tumbled by nearly 25% from the peak they hit in early June. This sell-off has pushed the company's dividend yield back over 4.5%. That's a pretty attractive payout for a company that has been an excellent passive income producer over the years.
Phillips 66 increased its dividend by 5% last month, marking its 11th payout increase since its formation a decade ago. The refining company has grown its payout at an 18% compound annual rate over that time.
That high-yielding payout is on solid ground these days. Refining margins are soaring thanks to robust demand for refined petroleum products like gasoline, jet fuel, and diesel. That's giving Phillips 66 excess cash to pay down debt -- it paid off $1.45 billion in April and plans to repay more later this year -- resume its share repurchase program, and invest in the future. The company recently revealed plans to convert its San Francisco refinery to a renewable fuels facility and signed a partnership to deploy electric vehicle charging stations at its fueling stations and other strategic locations.
These investments in lower-carbon energy sources will help power the company's growth in the coming years. That should enable Phillips 66 to continue generating lots of free cash flow to support its dividend payouts. With the recent sell-off in the stock market sending its shares lower, now looks like a great time to pick up this passive income producer at a more attractive price and dividend yield.
An enticing high yield that could grow even bigger
Neha Chamaria (Energy Transfer): Energy Transfer's stock has lost almost 14% of its value in just one month. At the current share price, though, its dividend yields a hefty 7.7%, presenting income investors with an appealing opportunity.
Three things are worth noting here. First, the midstream energy company's payout is backed by growing cash flow. Second, it has numerous projects in development that should support continued steady dividend payouts. Third, and most importantly, management has said it aims to increase the company's quarterly payouts back to the highest level it ever distributed -- $0.305 per share -- which it paid until mid-2020, when it cut the dividend to focus on deleveraging. Energy Transfer recently increased its dividend by 30%, paying investors $0.20 per share on May 19.
Even if Energy Transfer stock rallies 25% from here, its target quarterly dividend of $0.305 a share, or annualized dividend of $1.22 a share, would imply a yield of nearly 9.8%. The point I'm trying to drive home is that Energy Transfer's yield isn't high just because its stock price has dropped. Those types of high yields are often unsustainable. A high yield underpinned by payout growth is what makes a dividend stock worthy of inclusion in your portfolio.
Also, it's worth recognizing the reasons why Energy Transfer is confident that it will be able to increase its payouts. Its midstream energy storage and transportation businesses are largely contracted. Almost 90% of its adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) this year are expected to be fee-based. The company also plans to spend up to $2.1 billion on growth projects this year, and is working on bigger things like building a liquified natural gas import terminal in Lake Charles, Louisiana. The company has been trying to bring this terminal online for several years, but the conditions in its end markets weren't conducive until now.
The prospects look promising, and with the company eyeing bigger dividends in the near future, Energy Transfer shouldn't disappoint investors seeking passive income.