When the S&P 500 is roaring higher and knocking on the door of an all-time high, a few percentage points of dividend yield may not seem that enticing.
However, the real advantage of dividend stocks isn't what they do during a raging bull market, but the security they provide during a bear market. When equity prices are crashing all around you, collecting reliable income without the need to buy stock can provide some extra dry powder to buy the dip on beaten-down growth stocks, or simply act as an income source.
The sweet spot is finding a stock that can deliver both dividend income and compound value over time. Chevron (CVX 0.37%), Procter & Gamble (PG -0.78%), and MSC Industrial Direct (MSM -0.01%) fit that profile. Here's why each stock is worth buying now.
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With oil prices down, Chevron looks like a buy
Scott Levine (Chevron): Falling fairly steadily from a price per barrel of about $94, benchmark West Texas Intermediate is now priced around $72. And with the fall in energy prices, energy stocks like Chevron have also dipped. The oil supermajor's stock has slipped more than 13% over the past three months as of this writing, meaning investors can pick up Chevron stock, and its attractive 4.2% forward-yielding dividend, at a better price.
Although the sinking energy prices may be disconcerting to potential investors, it's important to remember that energy prices are cyclical, so riding out these declines is part and parcel of being an investor in energy stocks. And while some management teams aren't adept at navigating their businesses through volatility stemming from falling energy prices, let alone maintaining or raising the dividend, Chevron's C-suite has demonstrated sufficient prowess. For 36 consecutive years, Chevron has logged dividend raises, making it one of the elite dividend-paying stocks available to investors.
One of the alluring aspects of Chevron as a dividend stock is that the company often generates sufficient free cash flow from its extensive operations up and down the energy value chain to cover its dividend.
CVX Dividend Per Share (Annual) data by YCharts.
And Chevron's free cash flow, presumably, will remain strong in the years to come, especially in light of the recent acquisition of PDC Energy, an acquisition expected to contribute $1 billion in annual free cash flow.
Shares of Chevron are currently valued at 7.6 times operating cash flow, representing a discount to its five-year average cash flow multiple of 9.4. That makes now a great time to grease the wheels of your passive income machine with Chevron stock.
Take advantage of P&G's down year
Daniel Foelber (Procter & Gamble): P&G has underperformed the market this year. And it could be a buying opportunity.
During a time when many consumer staples companies are seeing falling margins, P&G's margins are less than two percentage points off of an all-time high, while its net income has rebounded to a five-year high.
PG Operating Margin (TTM) data by YCharts
The strong performance, paired with a lagging stock price, has pushed P&G's price to earnings ratio down 23.6 -- which isn't necessarily cheap. But it is below the stocks' three-, five, seven, and 10-year median.
PG PE Ratio data by YCharts
I believe P&G deserves to trade above its historic valuation, not below it. The company has done a uniquely impressive job during this inflationary period by exhibiting unparalleled pricing power when so many of its peers have seen their margins compress or are just now building their margins back up.
2022 and 2023 proved how P&G is the undisputed industry leader across its businesses segments, and it's also demonstrated the advantage it has from a supply chain management perspective.
With 67 consecutive years of dividend raises, P&G is a reliable passive-income stock that also has what it takes to take market share and grow its operations for years to come.
MSC Industrial has long-term growth prospects and an attractive dividend
Lee Samaha (MSC Industrial): Maintenance, repair, and operations (MRO) product distributor MSC Industrial is a play on industrial production growth in the United States. In an era where global trade tensions are growing and the economy continues to suffer from supply chain constraints, many industrial companies have reshoring on their mind.
However, to shift manufacturing back from low-labor-cost countries will require investment in productivity-enhancing technology like automation and smart manufacturing, and it will also need a good-quality, reliable MRO supply to improve productivity.
That's where MSC Industrial's inventory management solutions, same-day shipping of products, e-commerce capability, and growing installed base of vending machines at customer sites come in. Through these initiatives and its focus on metalworking, MSC has generated organic sales growth in excess of industrial production growth in the U.S. over the past few years.
Its earnings have grown in concert, and its quarterly dividend of $0.83 puts the stock on a dividend yield of 3.4% at the current price. According to CFO Kristen Actis-Grande on the last earnings call, MSC targets "modest and consistent increases" in dividends over time.
With Wall Street analysts penciling in earnings per share of $6.14 for 2024, MSC's yearly dividend of $3.32 is well covered. Investors can look forward to long-term growth in earnings and dividends if investment in reshoring is set to grow in the coming decade.
