The holiday season is here! And while the stock market has been far more naughty than nice this year, the good news is that there are plenty of bargains worth stuffing into an investment portfolio's stocking.
Ford Motor Company (F -0.41%), Devon Energy (DVN -0.98%), and Baker Hughes (BKR -0.25%) stand out as three dirt-cheap dividend stocks to buy now. Here's why.
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Ford blends value and income
Daniel Foelber (Ford Motor Company): Ford stock is down nearly 44% from its all-time high set near the start of 2022. As painful as the drawdown has been, it is arguably justifiable.
Automakers fall into the consumer discretionary category. As the economy weakens and consumer spending falls, car companies run into trouble. And if the recession gets really bad, consumers are more likely to default on their car payments than, say, their apartment, home, utility bills, food, and other essentials.
The macroeconomic outlook isn't good for Ford and its peers. Rising interest rates throw yet another wrench in the investment thesis because they make financing new projects, like multibillion-dollar electric vehicle (EV) expansion, all the more expensive. Supply chain challenges make it difficult for legacy automakers to produce vehicles reliably. All told, Ford is currently in a tough spot, and the worst could be yet to come.
Putting Ford on your watch list instead of buying now makes perfect sense, given the level of uncertainty. But there are a couple of reasons why a starter position in Ford stock isn't the worst idea right now. For starters, the stock is dirt cheap -- trading at a price-to-earnings (P/E) ratio of just 6.3 and a forward P/E ratio of 7.1. To be fair, automakers like Ford tend to trade below market multiples. But Ford's EV prospects give the company a nice blend of value and growth.
Throw in Ford's 4.3% dividend yield, and you have a steady stream of passive income that matches the risk-free Treasury bill rate.
Oil the wheels of your passive income generation with Devon Energy
Scott Levine (Devon Energy): While the Chinese government's implementation of strict COVID-19 lockdowns to stymie the spread of the virus is the latest catalyst, energy prices have dipped lower on the fear of waning oil demand for a variety of reasons. This, in turn, led investors to shy away from Devon Energy, a leading upstream oil company that operates onshore in the United States. Investors seem to be speculating that energy prices will continue to dip, leading Devon Energy to reduce its mouthwatering dividend, which currently represents a forward yield of 8.1%.
Since there's a strong correlation between the movements in energy prices and those of energy stocks like Devon Energy, the stock's 11.2% decline over the past month -- a period during which West Texas Intermediate crude oil, an oil benchmark, fell more than 9% -- is not all that surprising. While it may be disconcerting for investors to see shares of Devon dip lower, it's important for prospective investors to recognize that the stock's decline isn't related to something materially wrong with the company's business model or operations; thus, it shouldn't preclude prospective investors from picking up shares.
As of this writing, investors can pick up shares of Devon for a song. The stock is now valued at about 7 times forward earnings, a steep discount to its five-year average forward earnings multiple of 19.6. Prefer to assess the stock's valuation using a cash-flow metric? No problem; the stock still looks attractive, valued at 5.3 times operating cash flow. No need to wait for the gift-giving holidays. Income investors have the opportunity to energize their passive income today with shares of Devon Energy.
Baker Hughes stock has the potential to outperform its industry
Lee Samaha (Baker Hughes): The price of oil, and by implication, demand for oil equipment and services, is highly cyclical. As such, it may not make sense to invest in the sector ahead of an engineered economic slowdown. However, all cycles are different and throw up different investment opportunities each time. In this case, I think it's time to risk uttering the most famous last words in investing: "It's different this time."
The reality is that, despite a widely anticipated slowdown, the price of oil is still around $80 a barrel. That's not a price traditionally associated with a recessionary period. Instead, it's a price associated with ongoing investment in Baker Hughes' solutions.
The strength in the price of oil is possibly due to some factors that don't look like they are going away anytime soon. For example, according to companies like Baker Hughes and Caterpillar, energy companies are exercising restraint in spending -- possibly in fear of the long-term future of the carbon fuel industry in the face of the threat from renewable energy, environmental regulation, and windfall taxes. Moreover, increasing geopolitical tensions are creating conditions where powerful OPEC member Saudi Arabia is increasingly aiming to cut production to keep prices high.
While capital spending restraints may appear to be a negative for Baker Hughes (it is over the near term), it sets up the industry for a long-graduated increase in oil prices and capital spending and possible avoidance of the traditional boom and bust cycles.
Baker Hughes is exciting because it's restructuring its operations and cutting costs. Of course, there's no guarantee Baker Hughes' plans will work, but it's usually a good idea to restructure when end markets are buoyant, and for now, that looks like the case for the energy sector.
