Value stocks have outperformed growth since the start of 2022, and that trend might continue if a recession is on its way. Even if a growth stock recovery is around the corner, it's still wise to keep some value stocks in your portfolio. These produce slow and steady returns, and they often provide dividends that are helpful for any investor.
If you've got $5,000 that you don't need to pay monthly bills, bolster an emergency fund, or pay down short-term debt, you might want to consider putting those funds toward one of these three investments (or all of them).
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1. PepsiCo
PepsiCo (PEP -2.02%) is a global powerhouse in the beverage and snack markets. The company owns dozens of popular brands, and its products are sold in nearly every country on multiple continents. Pepsi might have a reputation for playing second fiddle to its rival Coca-Cola, but PepsiCo is a larger operation than just its namesake brand. The company's portfolio includes Frito-Lay, Doritos, Quaker, Gatorade, Lipton, Tostitos, Ocean Spray, Dole, and numerous other energy drinks, soft drinks, groceries, and snack brands.
Its North American beverage segment only contributed 30% of total revenue last year. That extreme level of diversification and market penetration somewhat limits PepsiCo's potential growth rate, but it also creates remarkable stability. Its breadth of offerings basically guarantees a share of household budgets all over the world, and demand for these consumer staples tends to resist demand shocks during recessions.
Brand strength and an enormous scale also create a significant economic moat. It would realistically take years for a competitor to substantially disrupt PepsiCo's position. This means that investors can trust PepsiCo to deliver predictable cash flows year after year, unlike other companies that are very sensitive to economic conditions and competitor innovations.
PepsiCo management forecasts 8% revenue growth in 2023 with stable profit margins. That's uncharacteristically high growth, but investors have come to expect that single-digit rate of expansion over the long term. The stock pays a 2.6% dividend yield to shareholders, so a $5,000 investment today would offer up about $130 in annual dividends. PepsiCo should generate plenty of cash to maintain and grow that dividend in the coming years, further solidifying its designation as a Dividend King -- and as a value stock that investors need to consider.
2. KLA Corp.
KLA (KLAC 2.28%) provides equipment and services to the semiconductor and electronics manufacturing industry. Its product suite includes specialized measurement devices, defect detection systems, and analytics tools. These all allow semiconductor producers to design and manufacture chips more efficiently.
Semiconductor stocks are notoriously cyclical and subject to numerous economic factors. Some of these disturbances naturally make their way to KLA's operating results, but its position as an equipment supplier insulates it from that cyclicality. Demand for capital equipment doesn't fluctuate as much from year to year. However, KLA is indirectly exposed to the demand catalysts that have investors excited about the semiconductor industry leaders.
This all makes KLA a relatively slow and steady play on the semiconductor industry. Its highly specialized product portfolio creates a wide economic moat, so the company is a strong bet to continue along its impressive operational path. KLA has consistently delivered revenue growth and a high return on invested capital (ROIC) over the past decade.
KLAC Return on Invested Capital data by YCharts
These metrics are clear evidence of sustainable demand and a strong competitive position. This is another company that's unlikely to impress with a high growth rate, but the stock trades at a very reasonable valuation -- its forward price-to-earnings (P/E) ratio is under 17. The stock even pays a 1.3% dividend yield.
3. 3M
3M (MMM 1.16%) offers more than 60,000 different products across a range of industrial, office, and household applications. Much like PepsiCo, it's almost impossible for 3M to post high growth rates due to the diversity and maturity of its product portfolio. However, this also promotes stability that protects the company from downside risks. Even in the midst of an economic slowdown that's hitting households and industrial companies, 3M still expects its sales to shrink slightly or stay the same in 2023.
Shares of the diversified industrial giant are depressed as investors await the results of legal action that could be very expensive. Over 300,000 lawsuits were filed on behalf of military veterans and other people who experienced hearing problems after training with faulty earplugs that were produced by a 3M subsidiary.
3M also faces potential liability for its longtime production of PFAS chemicals. These artificial chemicals, also known as "forever chemicals" because they can last in the environment, have generated lawsuits in several communities. The company plans to stop manufacturing PFAS chemicals worldwide by 2025, but legal experts believe that this won't protect 3M from liability for past uses.
$265 million has already been paid out related to earplug liability, and 3M has set aside $1 billion to cover its subsidiary's legal liabilities. It's hard to tell exactly how costly all the litigation could be, and it is likely to be in the billions and could seriously affect 3M's financial health. Strictly risk-averse investors should probably stay away from the stock right now. If you have $5,000 to invest, it's probably wise to avoid pouring all of it into this stock.
Nonetheless, investor fears have made 3M stock too cheap to ignore. Its dividend yield has climbed to 6%, while its forward P/E ratio fell below 12. This price reflects a significantly bad outcome from the earplug litigation, along with operational stagnation for the foreseeable future.
If the company avoids the worst-case scenario for this litigation and damages are limited, it should post a modest recovery when the economy rebounds. Along the way, it's likely to appreciate while continuing to pay a strong yield for today's shareholders.
