One of the key benefits of owning dividend stocks is the ability to reinvest the dividends to take advantage of the power of compounding. However, not all dividend stocks are table-pounding buys. A fair number of these equities sport premium valuations and offer little upside potential as a result. The good news is that the recent volatility in the broader markets has created some attractive buying opportunities in the dividend stock landscape.
For example, telecom giant AT&T (T 1.27%) and healthcare titan Kenvue (KVUE -0.13%) have both had a rough 2023. AT&T's shares have lost 17.9% year to date, while Kenvue's stock has plunged by more than 22% since its debut on the New York Stock Exchange in May. Here's why both of these struggling dividend stocks scan as undervalued and worth buying after their recent pullback.
AT&T: A buy ahead of Q3 results
AT&T has faced many challenges this year. The company's stock has been under enormous pressure since the telecom reported first-quarter results back in April. The market has reacted negatively to various issues such as slowing postpaid phone net adds, new forms of competition entering the market, potential liabilities stemming from legacy infrastructure, a high debt load, and underwhelming free cash flow (FCF) generation.
AT&T's sharp decline, however, could offer a great opportunity for long-term investors. Because of its falling share price, the company now offers a huge 7.3% dividend yield on an annualized basis. AT&T's shares are also attractively priced at around 6 times projected earnings.
With expenses expected to decrease over the next few years and a strong competitive position in a critical industry, AT&T ought to be able to improve the perception of its stock in the weeks and months ahead. The telecom's stock, in fact, could start to rebound next month, when it reports 2023 Q3 earnings, which should reveal the company's actual ability to meet its $16 billion in FCF generation target for the year.
Kenvue: Buy the dip
Kenvue screens as an outstanding bargain for long-term investors looking for a high-quality dividend stock. The company, which was spun off from Johnson & Johnson (JNJ -0.63%) earlier this year, sports a diversified portfolio of leading consumer healthcare brands such as Aveeno, Listerine, Neutrogena, Tylenol, and Zyrtec. These brands have a loyal customer base and generate strong cash flows for the company. Kenvue also has a solid track record of innovation and growth, with a history of more than 135 years in the industry.
Despite its attractive fundamentals, Kenvue has been under pressure this year because of the legal issues J&J, its former parent, faces over its talcum powder products. Kenvue, for its part, still faces potential liabilities from lawsuits that may arise outside the U.S. and Canada. This sharp pullback, however, has arguably created a buying opportunity for savvy investors who can look past the short-term noise and focus on the long-term potential of the company.
Why is Kenvue stock a compelling buy? Kenvue currently offers a generous dividend yield of 3.68%, which is modestly higher than the 3.3% average of its peers. Moreover, its shares are cheap at 16 times forward earnings. Within its consumer healthcare peer group, after all, the average forward-looking price-to-earnings ratio is 18.9. In all, Kenvue is a solid dividend play with an attractive valuation.