After steadily declining for what seemed like forever, the Nasdaq Composite index has been in rally mode for the last two months. It recently rebounded more than 20% from its bottom, entering a new bull market. While the Nasdaq is still more than 19% below its recent peak, it seems like the worst of the stock market sell-off might be in the rearview mirror.
Despite the recent rally, some stocks are still really cheap. Because of that, their dividend yields remain high. Three stocks our contributors believe offer a compelling combination of income and value these days are Stanley Black & Decker (SWK -2.41%), Diamondback Energy (FANG 0.43%), and Enterprise Products Partners (EPD -0.97%).
Heavy on the consumer sector
Reuben Gregg Brewer (Stanley Black & Decker): Most industrial companies are weighted toward business customers, but Stanley Black & Decker is different. The company makes tools, many of which get sold in hardware stores. Thus, the company has a lot of "short cycle" exposure because consumers tend to react more quickly than businesses to economic downturns. Stanley Black & Decker is indeed seeing a material fall-off in consumer demand, putting pressure on its profitability.
Making things worse, high inflation has increased the company's costs. This factor isn't unique to Stanley Black & Decker, but it makes the slowdown on the consumer side that much harder to deal with. The company is doing what you would expect, cutting costs and increasing prices. Still, there's no easy solution to these problems, which is one reason the stock is down roughly 50% over the past year. Long-term dividend investors should take notice, since the company's short-cycle heavy portfolio means results will be quick to rebound when the economy picks up again.
Meanwhile, Stanley Black & Decker is a Dividend King with over five decades of annual dividend increases behind it. It clearly knows how to deal with adversity while continuing to reward dividend investors. Despite the current headwinds it will increase its dividend in September by a token penny a share per quarter, a sign of confidence that it can muddle through today's headwinds. And the stock decline has pushed the dividend yield, currently around 3.2%, up toward the high side of the company's historical yield range, suggesting the shares are attractively priced. If you can handle some near-term uncertainty, Stanley Black & Decker looks like an attractive long-term buy.
Dirt cheap despite the rally
Matt DiLallo (Diamondback Energy): Shares of Diamondback Energy are up more than 20% this year. However, the high-yielding oil stock is still incredibly cheap.
Diamondback Energy estimates it can produce more than $4.3 billion of free cash flow this year, assuming oil averages $90 a barrel, which is around its current price point. With its market cap recently around $22.6 billion, Diamondback Energy trades at about 5.3 times free cash flow or an 18% free cash flow yield. That's incredibly cheap, especially for a Nasdaq-listed stock.
The oil company's dirt-cheap price is a big reason it offers such a high dividend yield. It recently increased its base quarterly dividend payment by 7% to $0.75 per share. At the current share price, it has an implied annualized yield of 2.3%. In addition to that fixed quarterly payment, Diamondback Energy also made a variable cash dividend payment of $2.30 a share. That put the combined payment at $3.05 per share, pushing the company's annualized dividend yield to an eye-popping 9.5%.
Diamondback Energy could have paid out an even bigger cash dividend. However, it's using some of its free cash flow to repurchase its dirt-cheap shares. It bought back $303 million in the second quarter and retired another $200 million early in the third quarter. Meanwhile, the board recently doubled its share repurchase authorization to $4 billion so that it can continue gobbling up its stock. Diamondback also increased its capital return strategy from 50% of its quarterly free cash flow to 75%, enabling it to return more money to shareholders through dividends and share repurchases.
With its oil business gushing cash, Diamondback Energy has the funds to continue paying a high-yielding dividend and repurchasing stock. That makes it an attractive option for investors looking for income and value amid the market rally.
A lot of steam left
Neha Chamaria (Enterprise Products Partners): With the Nasdaq gaining nearly 13% in the past month as of this writing, Enterprise Products Partners stock has rallied around 11% as well during the period. Of course, for an oil and gas stock, there's a lot more to its performance than just the broader market impact. Crude oil prices, in fact, have cooled off in recent weeks and triggered the outflow of money from oil exploration and production stocks into the relatively "safer" midstream oil stocks like Enterprise Products.
The thing is, Enterprise Products is one oil stock that could help you ride out the sector volatility, and the stock, even with its 7% yield, still looks cheap. Picture this: Enterprise Products is trading at only around 6.8 times free cash flow (FCF) -- also considerably below its five-year average price-to-FCF ratio -- at a time when the company's cash flows are hitting record highs. Yes, you read that right.
Enterprise Products' distributable cash flow (DCF) rose nearly 8% to $7.1 billion during the 12 months ended June 30. DCF is a key metric for master limited partnerships as it indicates whether the company is generating enough cash to sustain and grow its dividend. Its record-high second-quarter DCF covered its quarterly dividend payout comfortably by 1.9 times. It's worth noting here that Enterprise Products had just increased its dividend in July for the 24th straight year.
Given how incredibly well-placed Enterprise Products is right now in terms of financial fortitude and dividend growth, the stock looks like a bargain even at current prices for long-term investors. Enterprise Products has a solid pipeline of projects that should boost its backlog and therefore cash flows to eventually support bigger dividends for years to come.