The storied past of the Dow Jones Industrial Average and its continued relevance today to some segments of the market make it a go-to place for investors searching for industry-leading companies. Although the index isn't perfect, the majority of the 30 components in the index do a good job representing their sector.
Three Motley Fool contributors were asked to explain why Dow components Caterpillar (CAT +0.46%), Home Depot (HD 0.74%), and Chevron (CVX 0.95%) might make excellent dividend stocks worth buying in 2024. Here's what they had to say.
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Caterpillar is a free-cash-flow-generation machine
Scott Levine (Caterpillar): For investors looking to construct a better income portfolio, Caterpillar looks like a smart buy in these early days of 2024. The heavy machinery powerhouse built an impressive history of rewarding shareholders with its dividend, which now offers a forward yield of about 1.9%. And the dividend seems even more alluring considering the company's strong fundamentals that help support it. For all these reasons -- and the stock's attractive price tag -- Caterpillar is a smart addition for income investors.
Caterpillar has paid a quarterly dividend every quarter since 1933. The company warrants even further recognition for the past 29 years during which time it has consecutively raised the distribution on an annual basis. That's no small feat, and it places the company in an elite group of companies committed to rewarding shareholders.
While the company's dividend history is impressive, potential investors want to be confident that Caterpillar will continue making dividend payments in the future. Fortunately, they can rest easy knowing that the dividend seems quite sustainable -- with room for further increases. For one, Caterpillar has averaged a conservative payout ratio of 42.5% over the past five years. Furthermore, the company generates substantial cash flow. This warrants respect for a company that operates in a cyclical environment such as agriculture, construction, and mining.
CAT Dividend Per Share (Annual) data by YCharts.
Over the past decade, Caterpillar's free cash flow generation has significantly covered its dividend payout.
With Caterpillar stock changing hands at 12.8 times operating cash flow, a discount to its five-year average cash-flow multiple of 14.3, now seems like a great time to pick up shares of this heavy machinery heavyweight.
NYSE: CAT
Key Data Points
Home Depot is a great way to play a recovering housing market
Lee Samaha (Home Depot): Last year wasn't a vintage year for the housing market, but what can you expect when interest rates rise? Increasing mortgage rates put the brakes on the housing market, which puts pressure on home improvement spending.
In addition, the home improvement market came up against difficult comparisons with previous years due to the boom in spending on the home created by the pandemic lockdowns. Indeed, Home Depot expects its full-year 2023 sales to decline by 3% to 4% compared to 2022, with its earnings per share down 9% to 11% on the same basis.
That said, interest rates won't rise forever. In fact, the market is starting to price in the likelihood that the Federal Reserve will cut rates next year. Moreover, there are other promising signs that the housing market could bounce with lower interest rates. For example, Wells Fargo's residential mortgage loans show no significant signs of stress regarding non-performing loans.
An improving housing market will help Home Depot, as homeowners tend to spend on repairs and improvements as they ready homes for sale, and the feeling of net asset value rises in line with house price increases. As such, Home Depot sales can potentially surprise to the upside in 2024. Throw in a 2.4% dividend yield, and it's an attractive stock to invest in.
NYSE: HD
Key Data Points
Chevron stock is down despite the company's strong fundamentals
Daniel Foelber (Chevron): Investors are getting the chance to buy Chevron stock at a discount, as it's trading down 17.9% over the last year. And the future is bright for the integrated oil and gas major.
Chevron reports its fourth-quarter and full-year 2023 earnings on Feb. 2. Investors will see how Chevron performed during a quarter that marked the lowest oil prices of 2023. I think folks may be surprised to see how well Chevron can do in this environment and how well it should do in 2024.
Brent crude oil is hovering around $78, which isn't bad but it's also not as high as where it was in early 2023. The good news is that Chevron can still do very well when barrels of Brent are trading in the $60s or $70s, and can fund its operations and dividend even when Brent is at $50 a barrel.
Chevron has a mere 10.7 price-to-earnings ratio. And although Chevron's forward earnings could be lower based on a lower average oil price in 2024 compared to last year, it's worth remembering that Chevron will get boosted earnings and free cash flow from its acquisition of Hess.
Chevron had the balance sheet to buy Hess. Once the deal goes through, Chevron will still have a great balance sheet, added diversification from new plays like Guyana, and an extremely efficient production portfolio that can do well even when oil prices are low.
NYSE: CVX
Key Data Points
In addition to being a good value, Chevron is also a quality dividend stock. It has a yield of 4.2% and a track record of raising its dividend even during oil and gas downturns. In fact, Chevron has raised its dividend for 36 consecutive years.
Add it all up, and Chevron is simply too good of a company to be trading at such a steep discount to the market.
