Dividend stocks can provide income and stability to an investor's portfolio. Better yet, those that are consistent dividend payers have a proven history of outperforming the S&P 500.
With 2022's volatile market, many once-reliable dividend stocks have dropped significantly. The good news is that when a stock drops in price, its dividend yield goes higher. Here are three dividend stocks to consider buying on sale.
1. Sherwin-Williams
Anyone who has ever painted a house is familiar with Sherwin-Williams (SHW +1.14%), a leading paint and coating manufacturer. Like many other home improvement stocks, Sherwin-Williams has disappointed in 2022, with its share price dropping nearly 35%. Still, the 156-year-old company announced record revenue for its most recently completed quarter at $6.05 billion.
NYSE: SHW
Key Data Points
While many companies are struggling with their gross margins because of supply chains and inflation, Sherwin-Williams successfully raised its gross margin from 41.6% in the third quarter of 2021 to 42.8% in the third quarter of this year. CEO John G. Morikis pointed to the company's pricing power as the reason the gross margin improved, meaning demand remained strong for its products despite higher prices.
Sherwin-Williams is a Dividend Aristocrat (a stock that has raised its dividend annually for at least 25 consecutive years), having increased its payout for 44 straight years. The quarterly dividend is now $0.60 per share, which yields 1.06%. While that might not sound attractive to all investors, it is the highest for the paint manufacturer since March 2020, when the COVID-19 lockdowns began.
Lastly, a key metric for any dividend stock is its payout ratio (annual dividend payments divided by annual earnings) to ensure the company can afford to maintain and potentially raise its payout. Generally, if a company has a payout ratio higher than 75%, there is a higher risk of a dividend cut. Sherwin-Williams' payout ratio sits at roughly 33%, so you can expect the company to keep raising its dividend for years to come.
2. Stanley Black & Decker
Stanley Black & Decker (SWK +1.51%), a leading manufacturer of tools and household hardware, has raised its payout annually for 55 consecutive years, which makes it a Dividend King. Currently, the quarterly dividend of $0.80 per share represents a roughly 4.2% annual yield. Its stock has struggled in 2022 and is down about 59% year to date.
NYSE: SWK
Key Data Points
As the company's share price has fallen from its all-time high in 2021, so has its price-to-earnings (P/E) ratio -- a common metric for valuing companies -- to roughly 12. For comparison, its median P/E over the past five years is 21.4.
The company, like many others, is struggling with inflation and higher-than-desired inventory levels. As a result, its gross margin fell to 24.7% in the third quarter, down from 32.2% a year ago. Despite the pressure on margins, CEO Don Allan says he is committed to bringing the figure back to historical levels of 35% through a "supply chain transformation."
Based on Stanley Black & Decker's track record, the company will likely continue to raise its dividend each year and grow by acquisition. For example, it acquired MTD Holdings and Excel Industries, two landscaping-equipment businesses, in December 2021 for a combined $1.9 billion. According to management, those two brands contributed nearly $600 million of revenue, or approximately 18% growth.
So even though the stock has struggled in 2022, investors shouldn't leave it for dead yet. The company is reaching new revenue records and will likely continue to pay healthy dividends while management attempts to stabilize gross margins.
3. VF Corporation
While VF Corporation (VFC +1.50%) might not be a household name, investors are likely familiar with its four core brands: Dickies, The North Face, Timberland, and Vans. It's been a tough year for VF stock, which is down more than 60% year to date.
Key Data Points
Investors might be concerned that revenue is down about 1% for the first half of VF's fiscal 2023. Management recently downgraded its guidance for earnings per share to the range of $2.40 to $2.50 versus the previous outlook of $2.60 to $2.70.
And VF's inventory skyrocketed to over $2.7 billion for its 2023 second quarter, 88% higher year over year. Management points to inflationary pressures on consumer spending for lower revenue and rising inventories.
As a result of the meteoric fall in VF's stock price in 2022, the company currently pays an eye-popping 7.28% dividend yield. Although its payout ratio is relatively high at 77%, management signaled its stability by raising the quarterly dividend by 2% this week to $0.51 per share. The company has paid a quarterly dividend since 2010 and has raised it each year except in 2020 due to COVID-19.
Its P/E is at a 10-year low of roughly 11 as of this writing. That's quite a drop from its five-year median P/E of about 29. Despite some risks, VF Corporation's popular apparel brands leave it well-positioned for its stock to bounce back as the economy eventually recovers -- and in the meantime, investors can collect outsize dividends.
Are these dividend stocks buys?
These three dividend stocks have have a combination of inflation, supply chain, and inventory issues in 2022. Still, all three have established themselves as leaders in their respective industries and have a history of consistently raising their payouts, making them all worth consideration for any dividend investor's portfolio.
