Earnings season is underway, and stock market volatility is rising as companies give investors an updated reading on the state of business and the broader economy. Forty-year high inflation paired with recession fears contributed to the stock market's brutal first half of 2022. Add it all up, and there's a good deal of uncertainty weighing on the U.S. stock market right now.
Dividend stocks can ease the pressure of a bear market by providing investors with passive income without the need to sell stocks on the cheap. Johnson Controls (JCI 1.54%), Deere (DE -0.18%), and American Electric Power (AEP 0.83%) are down 42%, 32%, and 9%, respectively, from their all-time highs. Here's what makes each dividend stock a great buy now.
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Johnson Controls looks heavily oversold
Lee Samaha (Johnson Controls): Down an eye-watering 42% in 2022, the building products and climate control company is definitely in the dog house among investors. Part of the reason for that comes from management disappointing investors by slashing its full-year guidance on the second-quarter fiscal 2022 earnings report in early May. Unfortunately, management proved too optimistic in its assumptions about dealing with supply chain constraints and raw material availability. As such, investors will be in "show me" mode for a while.
That said, there's reason to believe that Johnson Controls can come back strongly in 2023 and beyond. First, the main issue in the first half of 2022 is not orders (three-month trailing orders up 11% in the second quarter) or backlog (standing at a record $10.9 billion). Instead, the company found it challenging to procure semiconductors for much of its higher-margin equipment, notably systems and controls. However, if and when the issues are sorted out, there's a margin expansion opportunity as the company executes on its backlog. Indeed, management believes that's exactly what will happen in the future.
Thinking longer term, the company's building products and systems have a lot of growth potential from its products' role in helping building owners meet their net-zero carbon emissions goals and the need for healthy buildings in the wake of COVID-19. Throw in a 3% dividend yield while you wait, and it's an attractive stock for patient investors.
Pave your portfolio with passive income and long-term growth
Daniel Foelber (Deere): Deere stock has been on a roller coaster the last couple of years -- from falling below $140 a share during spring 2020, to blasting to a new all-time high of over $445 a share in April, to tumbling down 35% from that high in less than three months. Part of the reason for the Deere stock surge was the prospect of a boom in U.S. agriculture production in response to strained supply due to the war in Ukraine. However, farmers may be less inclined to outlay sizable expenditures if they feel higher commodity prices will be short-lived due to a potential impending recession.
Despite the uncertainty, Deere stock is beginning to look attractive at its lower price. It has a price-to-earnings ratio of 15.5 and is teed up to have a record year in 2022. Moreover, Deere has done an excellent job of returning capital to shareholders through the dividend and buybacks. But where it really stands out is its investments in research and development -- namely autonomous tractors, lower emission engines, and other products and services that support the industrial Internet of Things (IIoT). IIoT is a term for the increasingly interconnected industrial economy, which is transitioning from stand-alone mechanical processes to integrated electronics, sensors, and computing power. Deere's legacy customers may be hesitant to adopt this new technology. But there's no denying Deere is the best-positioned agriculture equipment supplier given its long-term investments and dense dealership network.
Deere's dividend yield of 1.5% may not be much. But investors should keep in mind that the dividend is just one of many ways Deere is returning value. It spends far more money growing its business than its dividend. By prioritizing growth, Deere is suited to lead the next several decades of international agricultural innovation.
This power producer can provide plenty of passive income
Scott Levine (American Electric Power): Bucking the trend of the market sell-off that has seen the S&P 500 plummet more than 19% since the start of 2022, shares of American Electric Power, a leading regulated electric utility, have remained positive, climbing almost 8%. But the news isn't all bright for the utility stock; despite their rise, shares are down about 9% from their 52-week high. Couple this with the fact that the stock is trading at 18.1 times trailing earnings, a discount to its five-year average P/E of 22.1, and it seems like American Electric Power, and its attractive forward dividend yield of 3.3%, is ripe for plucking from the bargain bin.
While a high-yield dividend and an inexpensive valuation may seem like a perfect pairing, it's critical that investors dig deeper into their potential investments in order to ensure that the company's hefty payouts aren't in jeopardy of disappearing. In doing this with American Electric Power, investors will find that there are several green flags. For one, the company has maintained a consistently conservative payout ratio of 64% over the past five years, suggesting that management espouses a circumspect approach to rewarding shareholders -- not one that risks the company's financial wellbeing. This approach, moreover, may likely continue. In a recent investor presentation, management identified a future payout ratio target of 60% to 70%. And turning to the balance sheet, investors will find more reassurance that American Electric Power retains an investment-grade balance sheet as rated by Moody's, Standard & Poor's, and Fitch.
During times of increased market volatility, investors will often grow risk-averse and look for the comfort of conservative stocks, such as utility stocks. Those who find themselves in this camp should certainly have American Electric Power on their radars.
