Finding a reliable dividend stock that can supplement income is a wonderful thing. But finding a stock that can power your passive income and unlock growth potential -- now that's a one-two punch that's hard to pass up.
Here's why Cognex (CGNX 2.06%), Estée Lauder (EL 1.70%), and Brookfield Infrastructure (BIPC -1.04%) (BIP -0.80%) stand out as three dividend stocks worth buying for investors who like dividends but want added upside potential as well.
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Buy growth stocks when they dip
Lee Samaha (Cognex): Now, I know what you are thinking, and you would be right. Machine vision company Cognex's yearly dividend per share of $0.28 (currently yielding 0.67%) isn't anything to write home about. Still, that's not the point. The fact that Cognex pays dividends affirms management's intent to return value to shareholders.
As a growth stock, the company's primary focus should be reinvesting in the business, and Cognex has ample opportunity to generate long-term value. The dip in the share price (down 10% in 2023 and 59% from its all-time high) is indicative of the near-term pressure the company is under.
The company can do little about its challenging end markets this year. Its main three end markets are consumer electronics, automotive, and logistics (mainly e-commerce fulfillment). Consumer electronics and automotive are interest-rate-sensitive industries, and logistics customers are pausing after a few years of torrid investment growth. As such, Wall Street expects Cognex's sales to decline 16.5% this year.
Still, the slowdown is likely to prove temporary. Cognex's solutions bring about significant improvements in productivity and quality control. Moreover, consumer electronics companies (Apple is an important customer of Cognex) will always need to develop new products; automotive manufacturers are investing heavily in electric vehicles (Cognex's EV-related revenue grew 30% in the last quarter) and no one disputes the long-term growth of e-commerce investment.
All told, Cognex is set to generate plenty of long-term value for shareholders, and as it matures investors can expect it to increase its dividend accordingly.
Estée Lauder is making the right moves to reward shareholders
Daniel Foelber (Estée Lauder): The market may be making a mistake by pounding the sell button on Estée Lauder stock.
The cosmetic conglomerate has done an excellent job developing and acquiring top brands and then leveraging its supply chain and resources to take a brand to new heights. The company has an excellent mix of timeless classics like the namesake Estée Lauder, as well as La Mer, M.A.C., Aveda, and others. But what makes the company unique is its ability to have sustained success with a luxury brand like Jo Malone, which it bought in 1999, and then go out and acquire up-and-coming brands like DECIEM Beauty Group's The Ordinary. In sum, Estée Lauder has a unique mix of classic brands, luxury brands, affordable brands, and niche/edgy brands. And that positions the company to target a wide audience across different demographics.
Aside from featuring its products online and in traditional brick-and-mortar stores, Estée Lauder is targeting a massive audience through airports, particularly international travel. If you've traveled internationally recently, chances are you have seen an Estée Lauder outlet store in the airport. Unlike a mall or a stand-alone store, where folks are there to shop, the majority of folks passing through an airport probably don't care to buy any Estée Lauder products. But Estée Lauder is playing a numbers game.
As an example, I recently passed through the Paris Charles De Gaulle Airport, one of the busiest airports in all of Europe. In June 2023, over 6.5 million people filtered through the airport. And in 2022, 57.46 million people used the airport. The Estée Lauder store was impossible to miss.
The way I view the company's strategy, it's similar to an advertisement at a sports stadium or the sponsorship of a sports team. It's a strategy centered on casting a wide net and getting a lot of exposure. I didn't buy anything at the Paris airport Estée Lauder store. But I certainly took some mental notes of some things I may get as holiday gifts for friends and family this year.
The strategy won't appeal to all investors. And it certainly has its weaknesses, especially if the global economy takes a turn for the worse and travel slows. Therefore, before considering the stock I think it's important for investors to accept the company's strategy and understand its motives.
Investors who like Estée Lauder's strategy may want to take a closer look at the stock, especially now that it is down over 40% year-to-date and has a yield close to 2%.
Brookfield Infrastructure's robust portfolio helps investors procure plenty of passive income
Scott Levine (Brookfield Infrastructure): From natural gas storage to data centers to toll roads and more, Brookfield Infrastructure operates a diverse range of infrastructure assets around the world. With the consistent cash flows that it generates through these assets, Brookfield Infrastructure has developed an impressive track record of returning capital to shareholders, as well as completing strategic acquisitions that contribute to the company's growth. While some investors are bearish on Brookfield Infrastructure's outlook, patient investors have a great opportunity to scoop up this 4.3% forward-yielding stock.
Between ongoing inflation and high interest rates, some investors are pessimistic about Brookfield Infrastructure's ability to achieve growth in the near term. But bears aren't the only ones paying this infrastructure stock attention. In fact, some analysts see ample upside to the company's stock. For example, Frederic Bastien, an analyst at Raymond James, recently upgraded the stock to strong buy from outperform and maintained a price target of $45, representing upside of about 50%.
Although the company's portfolio includes a variety of assets, its pursuit of greater exposure to data centers is a strategy that will benefit shareholders greatly in the future. As artificial intelligence solutions are increasingly adopted, data centers will serve an important function, making Brookfield Infrastructure's portfolio that much more robust. Furthermore, data centers provide long-term, steady cash flows with a weighted average contract length of 10 years. Plus, management forecasts data centers to provide an even greater internal rate of return (IRR) than the 12% to 15% IRR that it targets in acquisitions. While data centers accounted for $35 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023, management forecasts they will contribute EBITDA of $175 million in 2028.
Over the past 14 years, Brookfield Infrastructure has increased its distributions at a compound annual growth rate of 8%, and further growth seems to be in the cards. In the coming years, management is targeting 5% to 9% annual distribution increases.
