Even as the market swings up and down, some things remain boringly dependable -- namely, dividends. While many investors chase hot growth stocks, dividend stocks can provide solid gains over the long term and with a lot less stress.
Even if you have a high risk tolerance, a well-hedged and diversified portfolio should have at least some dividend stocks in it. If you have $5,000 to invest after paying off debt and funding for emergencies, Realty Income (O -0.17%), Home Depot (HD 0.94%), and PepsiCo (PEP -0.62%) are three great choices.
The king of REITs
If you don't own any REITs, you should consider adding one to your portfolio. And Realty Income is a great place to start.
REIT stands for real estate investment trust, and it is a kind of business structure where the company pays out 90% of its income as dividends. That's why REITs are generally incredible dividend stocks, and everyone looking for passive income should own at least one.
Realty Income's model is fairly simple. It buys and owns properties, and leases them out to tenants, usually large businesses. Realty Income is one of the biggest REITs in the world, with over 12,400 global properties, and its top tenants are companies like Walgreens, Dollar General, and FedEx. It's well-diversified by industry and tenants, with over 1,200 tenants in 84 industries. This gives it resilience, and its focus on essentials companies furthers that resilience. Its top category is grocery stores, which account for more than 10% of the total portfolio.
It's also valuable because it pays a monthly dividend. Realty Income's dividend yields 4.6% at the current price, which is high for a dividend stock, but not too impressive for a REIT. Some REIT stocks' dividend yields are much higher than that, but Realty has some other qualities that make it a standout. Some of the very high-yielding REIT stocks come with volatility; for instance, some of those that deal with mortgages are facing challenges in this high interest rate environment.
Realty is a safer stock, and you can rely on its passive income despite the operating climate. When the climate is tough, you can see just how resilient this stock is, making it an excellent choice to protect your portfolio when there's market volatility.
The power of a strong brand
Home Depot is having a tough year. The largest home improvement chain in the world demonstrated soaring growth early in the pandemic, and it's now hampered by inflation, a weak housing market, and tough comps from the pandemic success.
But these are short-term challenges. Home Depot has demonstrated over several decades that it's a well-run business with innovative strategies and forward thinking, and that's what continues to draw customers to its 2,300 stores and robust online presence.
The near term will continue to be rocky terrain. Results for the 2023 first quarter (ended April 30) came in below expectations, with comparable sales (comps) declining 4.2% from last year. Earnings per share (EPS) was $3.82, down from $4.09 last year.
The company dramatically lowered its 2023 full-year guidance from flat sales and comps to a 2% to 5% year-over-year decline, and a mid-single-digit decrease in EPS to a 7% to 13% decrease. Management reiterated its long-term goals of demonstrating 3% to 4% annual sales growth and mid- to high-single-digit EPS growth.
The silver lining here is that Home Depot stock is underperforming the market this year and is down 3%. At this price, shares trade at a cheap price-to-earnings ratio of less than 19. That's a great entry point for new investors, and Home Depot stock is a perennial winner that should bounce back with a better housing market.
In the meantime, Home Depot stock's dividend yields 2.6%, and shareholders can benefit from passive income no matter what's happening to the stock price in the short term.
The diversified brand portfolio
PepsiCo outperformed its rival Coca-Cola early in the pandemic since its snack and breakfast categories were big hits for people stuck at home eating oatmeal and Doritos. This diversification has been helpful to the overall business, and the company's popular brands give it leverage to raise prices in an inflationary environment.
In the 2023 first quarter (ended March 25), sales increased 10.2% over last year. EPS declined 54% to $1.40; however, core EPS -- which excludes one-time items and discontinued products, and is what PepsiCo uses as its baseline profitability metric -- increased 18% to $1.50. The entire operating segment showed strength in the quarter, but Frito-Lay snacks was a big winner, with a 15% year-over-year increase in sales.
Within all of its various segments, PepsiCo makes many best-selling products, and it has innovated with flavors, sizes, and new markets to generate higher sales under pressure. The North American beverage market was particularly strained in the first quarter, leading to an 86% drop in operating profit. This segment includes much more than the Pepsi brand, comprising labels like Mountain Dew, Lipton, and Gatorade. Management is working to optimize efficiency in this segment, and this is another place you can see how the company is protected by segments with better optimization under current circumstances.
PepsiCo is a Dividend King, having recently raised its dividend for the 50th consecutive year. The dividend yields nearly 2.6% at the current price, and shareholders can expect PepsiCo to pay it forever.
