The stock market rebounded nicely in 2023, with the benchmark S&P 500 delivering an exceptional total return of 26% year to date. As a result, many dividend-paying stocks have seen their dividend yields -- the ratio of a company's annual dividend to its share price -- fall to less attractive levels for income-seeking investors.
But not every stock has participated in the rally, so here are three dividend stocks that look incredibly cheap at current valuations heading into the new year.
1. Coca-Cola
Coca-Cola (KO) is a longtime favorite stock of prolific investor Warren Buffett, who first purchased shares through Berkshire Hathaway in 1988. Berkshire Hathaway still owns stock of the beverage giant today, receiving $704 million in dividends in 2022 despite never buying another share after it completed its $1.3 billion investment in 1994.
Coca-Cola's stock struggled in 2023, with a total return of roughly -5%. Nonetheless, Coca-Cola is a Dividend King, having paid and raised its dividend for at least 50 consecutive years.
Assuming management will stay the course, Coca-Cola will likely raise its quarterly dividend for the 62nd straight year in early 2024. Based on its previous quarterly dividend, the company currently pays an outsize annual yield of 3.2%. Again, that might be underselling it, given management's likelihood to raise it in the near future.
The company does have a relatively high net debt (total debt minus cash and cash equivalents) of roughly $25 billion, which will become more expensive to service as interest rates remain elevated. That scenario is already starting to play out, with Coca-Cola paying $1.1 billion in interest expense through the third quarter of 2023, a year-over-year increase of 93%. Smartly, Coca-Cola's management has been paying down its net debt, which has declined 22% over the past three years.
The good news is that Coca-Cola's revenue and earnings per share (EPS) are on the rise after recent lows. For its full-year 2023, management projected organic revenue (excluding currency fluctuations and recent acquisitions, divestitures, and structural changes) to grow 10% to 11% and its EPS to grow 13% to 14% on a currency-neutral basis compared to 2022.
So, despite Coca-Cola's stock struggles, the company should continue rewarding shareholders as a market leader with a consistent and rising dividend.
2. Harley-Davidson
The next stock on this list is another iconic American brand, Harley-Davidson (HOG 4.57%), known for manufacturing motorcycles. The stock has severely underperformed the market over the past five years and in 2023, generating a total return of roughly 25% and -12%, respectively. Nonetheless, Harley-Davidson has consistently paid dividends since 1993, with a current annual yield of 1.8%.
Beyond its dividend, Harley-Davidson management favors share repurchases, lowering its outstanding share count by 4.5% in 2023 and 13% over the past five years. By reducing its outstanding shares, management returns capital to shareholders in a more tax-efficient way by increasing the ownership stake of each remaining share.
As for why the stock struggled in recent years, look no further than the company's revenue. When you consider price hikes and inflation, anytime a company's revenue steadily declines, it could signal a fundamental problem with the business.
In Harley-Davidson's case, its waning popularity is the culprit. Harley-Davidson's annual revenue peaked in 2014 when it generated $5.5 billion and hit rock bottom in 2020 with $4 billion during the height of the pandemic.
HOG Revenue (Annual) data by YCharts
Encouragingly, the company's revenue has rebounded over the past few years. Moreover, through the first nine months of 2023, it generated total revenue of $4.8 billion, a year-over-year increase of 4%. The increase is mainly from its financial services, up 17% year to date to $707 million as interest rates remain elevated. On the flip side, the company is having a more challenging time selling its motorcycles, which was illustrated in its most recently reported quarter when unit sales dipped year over year by 16% worldwide.
One last key metric is Harley-Davidson's low payout ratio -- annual dividends payments divided by annual earnings -- which stands at a mere 13%. This suggests that the company is likely to increase its dividend and keep buying back its shares, which is welcome news for patient investors who are waiting on the cyclical business to potentially rebound.
3. Target
Big-box retailer Target (TGT 0.18%) is the second Dividend King on this list, having paid and raised its dividend for 52 consecutive years. The stock, trading for roughly $141 per share, has been unusually volatile since the beginning of 2023, with a 52-week high near $182 and a 52-week low of $103. Despite the fluctuation, the stock has been roughly flat over that period, with a total return of approximately -2%.
Today, Target pays a quarterly dividend of $1.10, equating to an outsize annual dividend yield of 3.1%. The company has a comfortable payout ratio of 55%, and management has repurchased nearly 8% of its outstanding shares over the past three years.
As for why the stock has stumbled compared to the overall market in 2023, management called out "higher-than-expected shrink and softer-than-expected sales." "Shrink" is a term the industry defines as lost inventory caused by employee theft, employee error, damage, and shoplifting. Target management specifically singled out theft and organized crime as the main culprits of shrink, going as far as closing nine stores to combat the alleged problem.
Revenue is down about 3% through three quarters of Target's fiscal 2023 compared to the prior year. Despite sales being down, management has increased the company's profitability by prioritizing efficiency.
Specifically, Target generated $2.8 billion in net income through its fiscal third quarter of 2023, ended Oct. 28, representing a year-over-year improvement of 45%. Target has done this by reducing its inventory by 14% year over year, meaning the company can rely less on heavy discounting to move products, helping both the top and bottom lines.
Are these dividend stocks worth buying?
Despite facing challenges keeping pace with the overall market in 2023, these three companies have a proven track record of success. They're in the mature phase of their business cycles, so don't expect huge spikes in price appreciation. But here's the upside: Their management teams are laser-focused on giving back to shareholders, primarily through regular dividends.
If you're an investor interested in stable business and consistent dividends, these three stocks are worth considering, especially at a discount.
