The dog days of August are upon us. In much of the world, it's time to try to beat the heat and stay cool, and for the stock market, it is typically a relatively sleepy period as earnings season winds down and many investment managers are enjoying vacations before the fall kicks into gear. It's a great time for investors to sit in the shade, take a look at their portfolios, and consider boosting their income by adding some new dividend stocks into the mix.
Investors don't have to scour the ends of the Earth to find some great companies to add to their portfolios. Legendary investor Peter Lynch, who outperformed the broader market for years as the manager of Fidelity's Magellan Fund, championed the idea that investors should invest in what they know and buy stocks of companies that they encounter in their day-to-day lives.
The strategy served Lynch well. For example, an investment in Dunkin' Donuts turned out to be one of the best-performing investments of Lynch's career. He got the idea because he enjoyed its coffee and noticed that the locations he frequented were usually busy, and then followed that up with further due diligence. With this in mind, what stocks might Lynch buy now as the dog days of summer set in? Here are three to consider.
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1. Coca-Cola
The next time you're opening up an ice-cold Coke this summer, consider adding some Coca-Cola (KO 0.11%) shares to your portfolio. The same reason you are enjoying a Coke is the same one that continues to make it a great, long-term investment; it is a product that people all over the world enjoy and buy on a frequent basis.
Case in point: During a challenging time for the economy, Coca-Cola just reported second-quarter earnings, and it actually increased its revenue growth guidance for the year, from 7%-8% to 12%-13%. It also grew revenue by 12% year over year, a remarkable feat for a business of Coca-Cola's size and scale (not to mention the fact that it is a 130-year-old company). Coca-Cola has shown its value by outperforming the market in 2022, with a 9% gain year to date versus a loss of 14% for the S&P 500.
In addition to this continued sales growth and market-beating performance, Coca-Cola pays a dividend that currently yields 2.8%. The company reached Dividend King status a decade ago and has now increased its dividend for 60 years in a row. Investors can expect to enjoy years of continued dividend growth, as well as top-line growth, making Coca-Cola a top dividend stock to buy during August.
2. Watsco
Perhaps you find yourself cranking up the AC at home during the dog days of summer. Why not add shares of Watsco (WSO -0.51%) to your portfolio? The $10 billion Miami-based company is the largest distributor of HVAC and refrigeration equipment in the United States.
Its shares are down 12% year to date, roughly in line with the broader market, in large part because investors fear a tepid housing market will hurt Watsco's business. But 85% of Watsco's business is in replacement parts and will not be affected by the housing market. Plus, selling replacement components for air conditioners is a fairly recession-resistant business; if someone's AC goes out in the middle of a sweltering afternoon in August, they're likely going to call an HVAC contractor to get it fixed, regardless of how the rest of the economy is doing.
The HVAC distributor pays a dividend that yields 3.2%, which is well above the market average. Watsco also has an impressive track record. The company has paid a dividend for 48 consecutive years. Furthermore, it has raised its total annual payout for the past 10 years in a row and looks likely do so again by the time 2022 is over.
3. Pool Corp.
Finally, nothing goes together like hot weather and swimming pools. Take advantage of this popular way to beat the heat by adding shares of Pool Corporation (POOL 0.39%), the world's largest supplier of pool equipment and supplies, to your portfolio.
The Louisiana-based company's stock is down 35% year to date. As is the case with Watsco, the market is worried that a slowing housing market will dampen Pool Corp.'s results. But like Watsco, much of Pool Corp.'s revenue (60%) is tied to the less-exciting but steady business of pool maintenance, with another 20% coming from renovating and remodeling existing pools.
Shares of Pool Corp. tanked last week after the company reported earnings. While the company posted record revenue of $2.1 billion, which was a 15% increase year over year, the stock still sold off because this figure was slightly below analysts' estimates. This illustrates how the market can be fickle in the short term but offer opportunities to long-term investors. From the market's reaction, you wouldn't know that Pool Corp. raised its full-year guidance -- at a time when many companies are lowering guidance or pulling it altogether.
While the stock is trailing the market in 2022, long-term investors will zoom out and see that it has been a monster since its public market debut in 1995; the shares have returned over 39,000% since the company's IPO. Even investors buying the stock a decade ago would be enjoying a return of over 800% on their investment. The long-term history of Pool Corp.'s stock chart is up and to the right.
Pool Corp. pays out an annual dividend of $4.00 per share and yields 1.1% at its current share price, which is lower than the other names on this list but still adds to your total returns over time.
In conclusion, the dog days of the summer are a good time to sit back, cool down, and heed the advice of all-time investing great Peter Lynch by buying what you know. These three long-term dividend stocks with resilient businesses could be excellent additions to your portfolio.
