With the stock market's strong rally in the first half of 2023, it's easy for investors to forget that dividend stocks exist. After all, what good is a 3%, or even 5%, dividend yield when the stock market is up by double-digit percentages in just six months?
But looking at investing through this lens misses the point. Good dividend stocks provide passive income no matter what the market is doing. This predictability makes dividend stocks a great way to supplement income in retirement, produce stable returns, or simply devote a portion of your portfolio to something with lower risk, but also lower potential reward.
How much you personally want to allocate to dividend stocks depends on your age, risk tolerance, and interests. But chances are good that having some portion of your portfolio in dividend stocks is a wise move. Three Motley Fool contributors were asked to offer details on why Stanley Black & Decker (SWK 0.99%), Union Pacific (UNP -0.31%), and Watsco (WSO -0.18%) could be great dividend stocks to add to a diversified portfolio in July. Here's what they had to report.
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Tool up your portfolio for passive income with Stanley Black & Decker
Scott Levine (Stanley Black & Decker): One of the first rules that investors learn is that past performance doesn't guarantee future results. While this is true, it doesn't mean that acknowledging a company's past performance is fruitless. Take Stanley Black & Decker, for example. There's no certainty that it will continue to fare as well in the years to come as it has in the years gone by, but the company's impressive feat of earning Dividend King status is worth noting for those interested in buying and holding its stock with its 3.6% dividend yield.
For 55 consecutive years, Stanley Black & Decker has hiked its payout to shareholders. This doesn't guarantee that investors will see the same achievement over the next 55 years, but it does suggest that rewarding investors is inherent in the company's culture and won't change anytime soon. Additionally, the company's prudent dividend policy further illustrates how management isn't interested in jeopardizing the company's financial well-being to placate investors. Over the past 10 years, Stanley Black & Decker had a conservative average payout ratio of 46%.
Checking further into the company's financial health, investors will find more concrete evidence that suggests the company's well positioned to sustain its dividend: an investment-grade balance sheet as rated by Moody's, S&P Global, and Fitch.
Although Stanley Black & Decker's business faced some challenges in 2022 -- and it will likely continue to face some in 2023 -- it'd be foolish to dismiss the company altogether. Management is committed to righting the ship, implementing a cost reduction plan that is expected to yield annualized savings of $2 billion by 2025. In addition, the growing adoption of electric vehicles bodes well for the company's future prospects.
Trading about 25% lower than their 52-week high, shares of Stanley Black & Decker offer a great opportunity now for investors looking for a royal dividend stock that they can buy and hold for decades to come.
Take a ride on this reliable railroad stock
Daniel Foelber (Union Pacific): When it comes to delivering value to shareholders through dividends and buybacks, railroad giant Union Pacific reigns supreme. Over the last 10 years, Union Pacific reduced its outstanding share count by over a third, and more than tripled its dividend -- which now sports a 2.6% yield.
UNP Dividend data by YCharts
Like other infrastructure companies, Union Pacific's business model is fairly straightforward -- build and maintain a network and then collect revenue for transporting goods. Union Pacific operates in the western two-thirds of the United States, giving it a near-duopoly of the region with Berkshire Hathaway-owned BNSF railroad. Between 2012 and 2021, it invested $35 billion in its network and operations. However, it also laid off employees to boost its profit margins.
The question going forward is where Union Pacific will settle on its capital expenditures and operating expenses, especially given a potential recession. Although the short-term outlook remains uncertain, the long-term future is bright.
With Union Pacific, investors are getting a cyclical yet reliable freight carrier with a wide moat, competitive advantages, and a track record of returning value to shareholders through massive buybacks and dividend raises. What's more, Union Pacific is a far cheaper option than many quality consumer staple dividend stocks. With a price-to-earnings (P/E) ratio of 18 and a 10-year median P/E ratio of 19.6, Union Pacific routinely trades at a reasonable valuation, especially for a company of its caliber.
All told, Union Pacific is an excellent dividend stock worth owning for decades to come.
Watsco is ideally positioned to consolidate its end markets
Lee Samaha (Watsco): The heating, ventilation, air conditioning, and refrigeration (HVACR) parts and supplies distributor is the leading player in a highly fragmented market. The industry has a relatively small amount of manufacturers (seven companies account for 90% of units shipped in the U.S.) and a large number of distributors, with some 6,500 distribution companies in operation.
Watsco sources products from myriad manufacturers, but its key partner is Carrier, with which it has three joint ventures that accounted for 54% of its sales in 2022.
The company's business model is relatively simple to understand. Its history and future lie in expanding sales and geographic reach by acquiring smaller distribution companies, a so-called "buy and build" strategy. Once inside Watsco, management seeks to improve the performance of the acquired distributor by adding products, locations, and what it describes as "scalable technologies."
These technologies include its digital solutions (apps, e-commerce websites, etc.), which enable service engineers to quickly and accurately order parts when they are called out to repair HVACR equipment.
It's a strategy that's led to stellar returns for investors, including a massive ramp in dividend payments.
Data by YCharts
Given the ongoing trend toward urbanization and the need for more efficient HVACR systems, it's likely that end demand for parts will remain strong. Meanwhile, Watsco's acquisition strategy and technological advantages over smaller competitors ensure it can add value through its "buy and build" approach. Sporting a 2.7% dividend yield, the stock is attractive for income-seeking investors.
