It can be hard to buy stocks when they're most attractively priced, because that often means they're out of favor. But if you can hold your nose and push the buy button, the end result is often more income and a price rebound -- a double win. That's exactly the story behind Texas Instruments (TXN 1.27%) and Realty Income (O -0.17%) today. And then there's Southern Company (SO -1.56%), which had been a utility industry laggard for years but is about to see a big change in its business. All three are worth doubling up on right now.
1. Texas Instruments is investing through the downturn
Texas Instruments is one of the world's largest producers of microchips -- but not the exciting complicated ones that drive AI. It makes simple chips that turn physical events into digital ones -- think pushing a button and having something happen on a device. These boring chips go into just about every product with computer tech in it. The world is only going to get more and more digital as well. Texas Instruments has ridden this ongoing wave to two decades worth of dividend increases. That said, the dividend yield is historically high today at 3.5%.
The reason for the high yield is that the chip sector is cyclical and currently in a downturn. Oh, and Texas Instruments is investing heavily in new chip capacity. That seems counterintuitive, investing during a downturn, but it prepares the company to come out the other side a stronger competitor. Given the long history of success here, Wall Street's jitters about spending into a downturn are probably an opportunity for long-term income investors to buy an attractive dividend growth stock on the cheap. The annualized dividend increase over the past decade was a hefty 17%.
2. Realty Income's business is adjusting to higher rates
Realty Income is the largest publicly traded net lease real estate investment trust (REIT). Net lease simply means its tenants pay for most property-level operating costs. The size difference, however, is huge, with Realty Income over three times the size of its next closest peer, market cap wise. Being bigger is really better for investment grade-rated Realty Income, because it has greater access to capital markets, which keeps financing costs low, and it can take on deals too large for its peers.
That said, the swift rise in interest rates has been a big headwind for the stock and the business: Conservative investors have shifted toward things like CDs, and higher rates make deals more expensive. That's why the REIT's yield is near 10-year highs at 6.1%. Eventually, however, the real estate market will adjust to shifting rates, as it has before, and Realty Income's strong industry position will again make it stand out from its peers. In the meantime, Realty Income is still finding ways to grow, such as buying smaller peers. It just agreed to buy Spirit Realty while that REIT's shares are cheap, too. While Wall Street worries about transitory issues, you might want to add some more to this attractive dividend stock.
3. Southern is shifting gears
Wall Street is starting to like utility Southern Company again. Its 4.1% dividend yield is toward the lower side of the 10-year range. Normally that would suggest a stock that's expensive, but there's a nuance here that makes Southern attractive.
For many years, Southern was working to build two nuclear power plants, known collectively as the Vogtle project. It wasn't going well, and investors shunned the utility's stock. But the first of those two nuclear plants is up and running and the second should be completed early in 2024. That changes the story in a material way, because the costs associated with construction will go away, and, more important, the two plants will start producing cash flow. Some of that cash will go to pay down debt, some will go toward other growth projects, and management is hinting strongly that some will go toward increasing the growth rate of the dividend.
The dividend trajectory here probably won't change right away, but eventually the goal is for dividend growth to track more closely with earnings growth. That suggests that dividend growth will increase from the low single digits into the mid-single digits, which is pretty good for a utility. Investors are already more positive here, given that Vogtle is nearly complete, but when dividend growth picks up, the shares are likely to be seen in an even more positive light. Now is the time for a deep dive.
Buy these reliable dividend stock while they're out of favor
Not every down-and-out dividend stock is worth buying, as a pair of dividend cuts from one-time reliable dividend payer VF Corp. prove. But Texas Instruments, Realty Income, and Southern are still very strong businesses with attractive prospects. Their yields are high, and there's every reason to think they will continue to grow -- a particularly attractive topic to consider with regard to Southern. If you think in decades and have a slightly contrarian streak, now is the time to consider doubling up on this trio.
