Stocks sold off last year as investors began to fret about economic growth in the face of surging interest rates. While conditions remain uncertain, the economy should eventually resume its ascent -- and that should spark a recovery in stocks.
In the meantime, investors have an opportunity to buy beaten-down stocks before they rebound. And one benefit to lower stock prices is that it leads to higher dividend yields.
Three top-notch dividend stocks that stand out to a few Fool.com contributors right now are Texas Instruments (TXN 1.25%), Brookfield Renewable Corporation (BEPC 2.75%), and Brookfield Infrastructure Partners (BIP 0.36%). Here's why they believe these stocks will eventually bounce back.
Doing well in the downturn
Reuben Gregg Brewer (Texas Instruments): The semiconductor industry is struggling and the shares of chipmakers like Texas Instruments haven't performed well. And yet this industry giant's business seems to be holding up. Despite a 3% year-over-year drop in revenue in the fourth quarter of 2022 (and an 11% sequential decline from the third quarter), it beat analyst expectations on both the top and bottom lines. The chip industry is highly cyclical, so investors should probably focus on the beat rather than the revenue headwinds.
Meanwhile, it is important to understand what Texas Instruments makes. Its chips are fairly simple and go into just about everything there is, from industrial products to tech gadgets. It has over 100,000 customers globally. The long-term trend is for more digitization, not less, so demand isn't going to fall to zero. And after the industry downturn is over, demand should pick up and boost Texas Instruments' revenue and earnings along with it.
But this is the really interesting part of the story. Texas Instruments is aware of the long-term trend and is using the downturn to build new chip plants. This capital investment activity should help it exit the downturn in a better position than it entered it. With a game plan like that, it's no wonder the company has increased its dividend annually for nearly 20 years, and at a massive 20% or so annualized clip over the past decade. The nearly 2.8% dividend yield is toward the high end of its historical range, suggesting that the stock is cheap today, but it probably won't be for long.
Powerful growth ahead
Matt DiLallo (Brookfield Renewable Corporation): Brookfield Renewable has lost nearly 30% of its value from its peak last year, mainly due to the bear market in stocks. That slump looks like an incredible buying opportunity. For starters, it has pushed the renewable energy juggernaut's dividend yield above 4%. Meanwhile, it has driven the company's valuation down to an attractive level, given its growth profile.
The company has several catalysts to power growth over the coming years:
Image source: Brookfield Renewable Investor Relations Presentation.
As that chart showcases, Brookfield could grow its funds from operations (FFO) by as much as 20% per share each year through 2027. It has already funded and secured at least 8% annual growth during that time frame, putting it in a strong position to deliver double-digit annual growth.
Acquisitions are a big potential growth catalyst. The company is currently working on a deal to acquire Origin Energy for its energy markets business to speed up its energy transition. It would take that company over, decommission its existing thermal assets, and build new clean energy generating capacity. The company believes acquisitions like Origin will produce strong returns and enhance its growth profile.
This forecast also positions Brookfield to continue growing its high-yielding dividend by at least 5% per year. The company has achieved that level of growth in each of the last 11 straight years.
That combination of income (a more than 4% yield) and earnings growth (8% secured) positions Brookfield to produce total annual returns of 12% or more in the coming years. Meanwhile, there's additional upside potential as its valuation improves, which should happen as the stock market rebounds once macroeconomic concerns fade.
Reliable dividends in difficult times
Neha Chamaria (Brookfield Infrastructure Partners): Barely weeks ago, shares of Brookfield Infrastructure Partners (Brookfield Renewable's infrastructure-focused sibling) plunged to their 52-week lows as investors dumped the stock on fears of a recession. Yet whether you see a recession ahead or not, this is one dividend stock that's down but not out. The reason: dividend growth, backed by reliable growth in cash flows.
You see, Brookfield Infrastructure Partners gets the bulk of its cash flows from regulated or contracted assets within defensive sectors and industries like utilities, midstream energy, toll roads, and data centers. Since its cash flows are stable, the company can pay out regular dividends and also increase them from time to time. More importantly, Brookfield Infrastructure Partners can hike its tariffs for services in an inflationary environment and can, therefore, still make money even if costs are on the rise. This was evident in its third quarter when the company's funds from operations jumped 24% year over year.
Brookfield Infrastructure Partners will release its fourth-quarter earnings on Feb. 2, and I expect yet another strong set of numbers that should set the company up for growth in 2023. It is already making big capital investments that should boost its FFO and support the company's target of increasing dividends annually by 5% to 9%.
Now picture this: Brookfield Infrastructure Partners stock is yielding a solid 4% right now and could hike its dividend per share by at least 5% this year regardless of how the economy fares. Eventually, all of that cash-flow and dividend growth should reflect in the stock's price, and before you know it, Brookfield Infrastructure Partners stock may not be this cheap anymore.
