Disruptions in China throughout the year stemming from COVID-19, the war between Russia and Ukraine, and rising interest rates have all weighed on the stock market in 2022. The S&P 500 index shed 19% of its total value during the year.
But while some investors have been worried about the steep downturn in financial markets, dividend investors have been able to keep some semblance of peace of mind. This is because the passive income provided by dividend stocks doesn't depend on market volatility.
Lowe's Companies (LOW -0.03%) and Philip Morris International (PM 0.68%) are two exceptional income stocks at the top of my watch list at this time. Here's why.
1. Lowe's: A steadily growing dividend payer
Lowe's is a leading player in the $1 trillion home improvement retail industry. Analysts are forecasting $97.4 billion in net sales during the current fiscal year from the retailer. That's meaningfully smaller than Home Depot's $157.5 billion in net sales being predicted for this fiscal year. But Lowe's is leaps and bounds ahead of the third-largest player in the industry, Menards, and its $13.1 billion in net sales in its previous fiscal year.
With the vast majority of current homeowners having mortgages that are below current rates, few are interested in moving to a new home and paying a higher interest rate. That's one reason why home sales declined 28.4% year over year in October, which was the ninth straight month that home sales dipped.
But with homeowners having to stay put for the foreseeable future, many will be more likely to do some minor renovations to stay in their current house. This should partially offset the drop in new home constructions that is expected to last another year or so.
That's why Lowe's earnings are still projected to grow at 9.9% annually over the next five years. The stock's 2.1% dividend yield is also moderately higher than the S&P 500 index's 1.7% yield. And with the dividend payout ratio set to come in just below 27% for the current fiscal year, the company appears poised to build on its decades of dividend growth moving forward.
Best of all, Lowe's forward price-to-earnings (P/E) ratio of 14.5 is significantly lower than the home improvement retail industry average forward P/E ratio of 17.4. This is precisely why analysts have an average 12-month price target of $237, which represents an attractive upside of 19%.
Image source: Getty Images.
2. Philip Morris: The global leader in tobacco
Philip Morris International's $157 billion market capitalization makes it almost as large as its next two competitors combined. Aside from its dominant Marlboro cigarette brand, the company also owns the top heat-not-burn brand, IQOS. Since its launch in 2014, IQOS has grown to a customer base of 19.5 million. Double-digit growth in IQOS volume is making up for declines in cigarette volume. That's how Philip Morris International's total volume has grown 3.4% through the first nine months of 2022 to 487.9 billion units.
This is why analysts believe that the company's earnings will increase at a 2.8% rate annually through the next five years. Philip Morris International's dividend payout ratio will clock in around 92% in 2022. At first glance, this would seem to be on the high end. But because tobacco companies require minimal capital to operate, this payout ratio should be sustainable for the near term. And as Philip Morris' dividend grows at a slower rate than its earnings over the next few years, the dividend should once again be quite safe.
The cherry on top is that income investors can snatch up shares of the tobacco giant and its 5% dividend yield at a reasonable valuation. The stock's forward P/E ratio of 18.7 is a well-deserved premium over the tobacco industry average forward P/E ratio of 13.4, which makes it a compelling pick for dividend investors.
