2023 is almost over. And unless some dramatic sell-off occurs, it was an impeccable year in the market. But there's no telling what the market will do in 2024 -- or any short time period for that matter.
Dividend stocks help smooth out the uncertainty that comes with investing in the stock market by providing stable, usually quarterly streams of dividend income no matter what the market is doing. In a year of massive outperformance like 2023, a dividend looks a bit negligible. But during a market downturn, a dividend can be a way to generate income without selling a stock when its down, and can even provide buying power to buy other stocks when they are on sale.
Here's why Phillips 66 (PSX -3.71%), Kennametal (KMT 1.18%), and United Parcel Service (UPS 0.14%) are three dividend stocks worth buying in 2023.
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Energize your passive income stream with oil and gas stock Phillips 66
Scott Levine (Phillips 66): With the holiday season in full swing, many investors are tightening their purse strings to accommodate their gift lists. That may mean temporarily giving up some personal indulgences, but it may also mean they're looking for bargains in the stock market. Fortunately for them, Phillips 66 -- with its forward-yielding 3.2% dividend -- is hanging on the discount rack.
Operating both midstream and downstream assets, Phillips 66 is an excellent energy choice for income investors looking to supplement their passive income. Earlier this month Phillips 66 announced a $2.2 billion capital budget for 2024, which includes $1.3 billion for growth projects. In particular, Phillips 66 plans on allocating $654 million for growing its refining business, including the transition of the San Francisco Refinery into what the company characterizes as "one of the world's largest renewable fuels facilities." This is part of management's overall initiative to improve its refining capability by investing in high-return projects that will help the company increase market capture by 5%.
Phillips 66 has demonstrated consistent interest in rewarding shareholders since it started paying a dividend in 2012. From then until now, in fact, Phillips 66 has raised its dividend at a compound annual growth rate of 16%. Further evidence of the company's commitment comes in the form of a recent announcement that the company has upwardly revised its target for shareholder distributions. Whereas the company had initially planned on returning $10 billion to $12 billion to shareholders from July 2022 through December 2024, it now expects to return $13 billion to $15 billion to investors over that time frame.
With shares of Phillips 66 currently changing hands at 6.9 times forward earnings, today sees like a great time to pick up shares of this high-quality, high-yield stock.
Kennametal is a solid income generator for investors
Lee Samaha (Kennametal): The tooling and metal-cutting products company isn't the most exciting investment, but it currently yields 3% and has solid end markets and earnings growth prospects.
Management recently held an investor day presentation and laid out plans to generate organic sales growth of 4%-6% through 2027, accompanied by adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expansion from 15.5% in 2023 to 20% to 23% in 2027. That combination is expected to produce a compound annual growth rate of 20% to 25% in adjusted earnings per share.
Given that management's stated capital allocation aims include returning "cash to shareholders via dividends and stock repurchases," it's hard to imagine its dividend payout won't increase significantly if the 2027 targets are hit.
Kennametal doesn't operate in high-growth markets (the 4% to 6% growth plan assumes just 1% to 2% annual market growth, with 1% to 2% coming from market share gains and 2% from pricing). This is more a story of the company refocusing on some of its higher-growth end markets, such as metal cutting tools in aerospace & defense and medical, as well as a solid contribution from its exposure to infrastructure spending.
At the same time, management plans to drive margin expansion by cutting costs by $100 million by closing plants to reduce structural costs and investing in automation and smart manufacturing facilities. All told, it all comes together to make Kennametal a boring way to generate growth and dividends over the next few years, and that's fine for many investors
UPS is too good of a company to pass up on
Daniel Foelber (UPS): UPS suffered a slight sell-off in response to worse-than-expected results and lower revenue guidance from FedEx (FDX 0.12%) on Dec. 19. And while UPS and FedEx have their similarities, and sometimes deserve to trade in tandem, that certainly hasn't been the case this year.
In fact, 2023 may be one of the biggest years of outperformance for FedEx over UPS -- ever.
Going into its Q2 fiscal 2024 earnings, FedEx was up 61.8% year-to-date, while UPS was down 7%. FedEx has done a better job protecting its margins than UPS. And FedEx stock had some catching up to do, as its valuation is still reasonable even after this year's run up.
But UPS stands out as the better buy for 2024. For one, the dividend yield is far higher -- 4.1% for UPS compared to 2% for FedEx. UPS has also done a phenomenal job growing the "sticky" parts of its business, such as healthcare and small and medium-sized businesses.
In addition to a downturn in the cycle, one of the reasons why UPS has been under pressure is that it failed to properly forecast near-term results, which caused repeated downward adjustments to its guidance. The stock market doesn't like poor results, but it dislikes uncertainty even more. Especially coming from a market darling like UPS that gave investors everything they could have asked for and then some in 2020 and 2021.
UPS has the makings of a quality turnaround play going into 2024. Sentiment is negative on the stock. And after FedEx's miss, it could be negative on the package delivery industry in general. That's a nice opportunity for investors who trust UPS to deliver over the long run. The attractive dividend yield is a worthy incentive to simply hold UPS and wait for the business to remind investors what it can do during an uptick in the cycle.
