When dividend stocks are down, income investors should take note. That's because when share prices fall, yields rise. And if the business in question is still in good shape, that could create an attractive buying opportunity for investors to secure higher-than-normal yields. Three such dividend stocks that are on sale right now are Johnson & Johnson (JNJ -0.46%), Bank of America (BAC -0.21%), and Target (TGT 0.18%). But are they actually good buys?
1. Johnson & Johnson
It's been a tough year for Johnson & Johnson. Its shares have underperformed the market significantly and are down 14% since January -- and that still leaves it the best performer among this trio. The healthcare stock should be in much better shape. Johnson & Johnson spun off its consumer health business earlier this year so it could focus more on the higher-growth segments of its business. And a return to normal in the healthcare industry should have given business a boost.
Earlier this month, the company released its third-quarter earnings results. Revenue grew at a rate of 7% year over year to $21.4 billion, and earnings per share (EPS) rose 4.3% to $1.69.
But the big problem around the business is that lawsuits covering tens of thousands of women's claims that asbestos in its talc baby powder products caused them to get cancer remain unresolved. In January, an appeals court threw out Johnson & Johnson's attempt to use a controversial bankruptcy strategy that shunted financial responsibility for those claims onto a subsidiary it created for the purpose of capping its potential costs.
Although the brand is otherwise strong and the stock is a Dividend King with a yield of more than 3%, the overhanging financial risk from those lawsuits prevents Johnson & Johnson from being a good stock to buy right now. Its liabilities in those cases could easily run into the tens of billions of dollars. That's too big a risk for many income investors.
2. Bank of America
Bank of America has performed even worse than Johnson & Johnson this year. It's down 23%, and fears that the economy is headed for a downturn have investors on edge about the big bank. With the share price near its 52-week low, its dividend yield is now at 3.7%, which is more than double the S&P 500 average of 1.6%.
The bank is coming off a strong third quarter, adding more than 200,000 net new checking accounts. That extended its growth streak to an impressive 19 consecutive quarters. And on the small business side, its growth streak hit 35 quarters. Revenue rose 3% year over year to $25.2 billion, while net income jumped by 10% to $7.8 billion.
The bank is doing well now, but the question marks are about what lies ahead for the economy. If it's not the soft landing that many hope for, Bank of America's earnings will come under pressure. But investors can take a cue from billionaire investor Warren Buffett, a Bank of America shareholder, who always bets on America and who doesn't worry about economic forecasts when picking stocks. Although the year ahead may be volatile, in the long run, Bank of America should remain an excellent investment to hang on to.
3. Target
The worst-performing stock on this list year to date is Target -- down 28%. The big-box retailer has been less resilient under recent economic conditions than some of its peers. That's because it relies more on consumer discretionary purchases, and staples like groceries are not as large a part of its business as they are for rival Walmart.
In its fiscal second quarter, which ended July 29, revenue was down 5% year over year to $24.4 billion. The good news is that the company was able to improve its bottom line due to better margins. Net income was $835 million -- more than four times the $183 million in profit that Target recorded in the prior-year period.
Not unlike Bank of America, the concern around Target is how a potential recession could hinder its operations. The stock is near its 52-week low, and that has pushed its dividend yield up to 4%. The company's payout ratio, however, is below 60%, suggesting that management still has plenty of room to pay and even raise its dividend. And with the company improving its margins and clearing out excess inventory, which was a problem in previous quarters, Target may be on a better trajectory.
Trading at only 12 times its estimated future profits, the retail stock is cheap, and could be worth buying.
