The Dow Jones Industrial Average has lagged the S&P 500 and the Nasdaq Composite so far this year -- which is normal behavior when the market is red-hot.
Instead of buying a Dow index fund, a far better approach is to scan the Dow's 30 components for quality buys. Boeing (BA 0.25%) is one of the best-known industrial companies on the market. Although it no longer pays a dividend, the airplane maker has a lot going for it and could be worth a look.
Meanwhile, Chevron (CVX 0.37%) and chemical company Dow Inc. (DOW 1.51%) have mostly missed out on the 2023 stock market rally. However, Chevron yields 4%, while Dow yields 5.4%. Plus both companies are making some compelling investments that could drive growth and support dividend payments for years to come.
Here's why Boeing, Chevron, and Dow are worth buying in July.
Image source: Getty Images.
Boeing is a buy for patient investors
Lee Samaha (Boeing): Boeing needs time to win over the doubters. As disheartening as that statement sounds, it's actually the most robust case for buying the stock. Simply put, there's a lot of doubt around the stock right now, but on balance, the company has an opportunity to overcome it and, in doing so, de-risk the stock.
The naysayers look at Boeing's operational mishaps (not least the 737 MAX grounding debacle, multibillion-dollar cost overruns on high-profile fixed-price defense contracts, ballooning debt taken on board during the pandemic, and ongoing supply chain issues) and conclude that the stock is too risky.
However, there are plenty of positives.
- For example, there's no shortage of orders right now, and Boeing has a multi-year backlog in place. At the time of writing, Boeing has a backlog of 3,655 Boeing 737 MAXes but expects to deliver only 400 to 450 this year.
- Moreover, Boeing's medium-term plan to hit $10 billion in free cash flow (FCF) between 2025 and 2026 (and reduce debt in the process) looks conservative.
- The company now has some high-profile industry veterans on its board of directors to help CEO Dave Calhoun achieve Boeing's aims.
- Meanwhile, the supply chain is improving, albeit more slowly than most hoped.
So it looks as if Boeing's recovery is mainly in its own hands. If the company hits its target of $10 billion in FCF in 2025/2026, the current market capitalization of $127 billion will look like an excellent entry point in a few years.
Chevron is a high-yield energy stock sitting in the bargain bin
Scott Levine (Chevron): After falling almost 40% since this time last year, the price of West Texas Intermediate crude, a benchmark for oil prices, is currently less than $70 per barrel. This has led many investors to shy away from energy stocks such as Chevron. But those familiar with the energy market know that these ups and downs in oil prices are par for the course, not something to be feared. In fact, they provide a great opportunity to pick up shares of Chevron and its 4% forward-yielding dividend.
A dividend powerhouse, Chevron has been increasing its payout to investors for 36 consecutive years. That's no guarantee that it will continue to do so for the next 36 years, but it's a strong indication that rewarding shareholders is a part of the company culture.
Another encouraging sign for income investors is the company's commitment to ensuring that the dividend is sustainable. One way Chevron is doing this is through acquisitions. In May, Chevron announced its plan to acquire PDC Energy, a domestic exploration and production company. Chevron estimates that PDC Energy will contribute $1 billion in free cash flow with the Brent crude oil price at $70 per barrel and a Henry Hub price of $3.50 per Mcf.
Currently, investors can power their portfolios with Chevron on the cheap. Shares are trading hands at 6.1 times operating cash flow, representing a discount to their five-year average ratio of 9.3.
Dow might just be the best dividend stock in the Dow Jones
Daniel Foelber (Dow): Since Dow spun off from DowDuPont in April 2019, its dividend has remained at $0.70 per share per quarter. When a company keeps its dividend steady instead of returning more value to shareholders, it can be a sign of weakness. But in Dow's case, the 5.4% dividend yield is already high enough.
Plus, there's been a good argument that funds were better spent paying down debt and bolstering the company's balance sheet -- which is exactly what Dow has done over the last few years in addition to buying back some shares. For this producer of commodity chemicals, there aren't exactly a lot of growth opportunities aside from gradually expanding capacity in lockstep with the economy.
However, one area that sticks out is the energy transition. Dow has been investing in more environmentally friendly products and lowering the emissions of its operations. In April, it announced a partnership with Linde to invest in the support of clean hydrogen and nitrogen in Canada. The integrated ethylene cracker and derivatives plant is expected to start up in 2027. The project was first announced in October 2021.
This is a major move for Dow. The company forecasts that the complex will decarbonize 20% of its global ethylene capacity and grow its global polyethylene supply by about 15%. These inputs are used for just about everything, from bags to liners, bins, packaging bottles, you name it. Dow expects the project to be profitable by contributing $1 billion of EBITDA growth across its value chain by 2030.
It's one thing to make sustainability targets; it's another to reduce emissions while also driving profits. Dow's shrewd business model, strong balance sheet, relatively high margins, high dividend yield, and inexpensive valuation (price-to-earnings ratio of just 13.3) make it a well-rounded, high-yield dividend stock that is worth buying in July.
