When it comes to exchange-traded funds (ETF) with a value focus, one of the go-to choices is the Vanguard Value ETF (VTV +0.14%). It features over $170 billion in assets and an expense ratio of just 0.04% -- and it's chock-full of quality, blue-chip businesses. As such, the fund can serve as a good starting point or a hands-off way to get exposure to value stocks.
One drawback of the fund is that it only yields 2.4%. Potentially better options for investors seeking passive income can be found among Dividend Kings -- companies that have paid and raised their dividends for at least 50 consecutive years. However, many Dividend Kings have yields below the Vanguard Value ETF's.
Yet, there are some standouts. Coca-Cola (KO +0.34%), PepsiCo (PEP +0.67%), Johnson & Johnson (JNJ 0.21%), and Stanley Black & Decker (SWK 1.41%) are four Dividend Kings that all yield over 3%, while Target (TGT +1.37%) is another good choice with a 2.6% yield. Here's what makes all five stocks good buys right now.
Image source: Getty Images.
1. Coca-Cola
Coca-Cola is perhaps the safest stock on this list. It is an industry-leading company that sticks to what it does best -- mainly, the non-alcoholic beverage industry. Given the nature of its low-growth business, the dividend is the main reason to buy and hold Coke stock over time.
Coke has delivered 62 consecutive years of increases, the most recent being a sizable 5.4% raise. As you can see in the chart, Coke's earnings per share have mostly supported a rising dividend. And when earnings do miss, which is rare, Coke can lean on cash from its balance sheet.
KO Dividend Per Share (Annual) data by YCharts
With a 3.3% yield, Coke can supply passive income to investors who are more focused on capital preservation than growth.
2. PepsiCo
Coke and Pepsi are close competitors. But the companies are actually very different. PepsiCo has a more diversified business across both food and beverages, including packaged snacks mainly through its ownership of Frito-Lay, as well as more meal-focused options like Quaker and Pasta Roni.
Coke has expanded beyond soda as well, through acquisitions of BodyArmor, Topo Chico, and Costa Coffee over the last seven years. But Pepsi may be a better fit for investors who are more concerned about the long-term growth of the soda industry and are looking for a diversified food and beverage company. Pepsi stock has a yield of 3%.
NASDAQ: PEP
Key Data Points
3. Johnson & Johnson
Johnson & Johnson has a different look since spinning off its household and personal products arm into a new stand-alone company called Kenvue. The new J&J operates through two segments -- Innovative Medicine (oncology, immunology, neuroscience, cardiovascular, pulmonary hypertension, and retina), and MedTech (orthopedics, surgery, interventional solutions, and vision). So even without Kenvue, the drugmaker has a large and diversified business.
The stock is down slightly year to date and has been a market underperformer for years.There are some good reasons for that, including lawsuits over talc-based products and concerns about slowing growth. However, a lot of those concerns could already be priced in.
J&J stock has a forward price-to-earnings ratio of just 14.3 -- which is dirt cheap for a reputable Dividend King. It also has a payout ratio of just 34% -- indicating that the dividend is affordable. Finally, it has a competitive yield at 3.1%. Although the company is on perhaps less solid ground than in the past, its valuation and dividend yield are excellent.
NYSE: JNJ
Key Data Points
4. Stanley Black & Decker
Stanley Black & Decker investors have been through a turbulent few years. The company thrived during the initial onset of the COVID-19 pandemic as demand outpaced supply. But that windfall did more harm than good by pulling forward sales.
The tool maker then had to combat supply chain disruptions and inflation. The multi-year turnaround has been painful. At its worst, the stock reached an eight-year low in the fall of 2022.
The good news is that the company is making progress, with much higher earnings expected in 2024 compared to 2023. With the worst likely in the rearview mirror, Stanley Black & Decker and its 3.4% dividend yield look like a good buy now.
NYSE: SWK
Key Data Points
5. Target
Speaking of successful turnarounds, Target stock is up a red-hot 64% over the last six months-- a huge move for a Dividend King, let alone a stodgy consumer-focused retailer. The move is a combination of Target selling off way too much, and underlying improvements in the business.
As with most retailers, Target's operating margin is extremely important. A single percentage point change in the margin can mean over $1 billion in annual operating income. The following chart illustrates the effect that rising (or declining) margins can have on the stock price.
The company underwent a prolonged period of weak margins in 2022 and 2023 after overestimating consumer demand, carrying too much inventory, and overall poor supply chain forecasting. As you can see in the chart, margins bottomed before the stock bottomed, and there was a brief "prove-it" period before the stock took off.
Target isn't as cheap as it used to be. But it's still a quality value stock with a 19.2 P/E and a 2.6% yield.
5 great buys now
Companies with multi-decade track records of dividend raises and high yields are hard to find. But the five stocks on this list have value and consistency, and the yields to go with them.
As with most investments, there is a bit of give and take when investing in these types of companies. The business models are based on modest growth and returning capital to shareholders through dividends and buybacks, which leaves less room to reinvest in the business. But there's only so much capital that can be deployed in a company like Coke to improve existing processes before it becomes borderline wasteful. So it is often better for these companies to return money directly to shareholders.
All told, Coca-Cola, PepsiCo, Johnson & Johnson, Stanley Black & Decker, and Target are good alternatives to the Vanguard Value ETF if you're looking for more yield without sacrificing stability.
