So far this year, Boeing (BA +0.47%) has been the second worst-performing stock in the Dow Jones Industrial Average (behind only Intel). But just because a stock is down doesn't automatically make it a good value.
Here's why 3M (MMM 1.90%), McDonald's (MCD 0.14%), and Chevron (CVX 1.44%) are three better Dow dividend stocks to buy now.
Image source: Getty Images.
3M is on the road to recovery
Lee Samaha (3M): It's interesting to compare Boeing with 3M. Both industrial giants have seen better days, and both entered 2024 with questions about their strategic direction. But here's the difference: Boeing has continued to disappoint investors, and there are serious questions about the viability of its plan to hit $10 billion in free cash flow (FCF) in 2025/2026.
On the other hand, 3M's management is slowly rebuilding some confidence in investors and derisking the company. Furthermore, the new CEO, William Brown, has an opportunity to outline his vision for the company. As such, Boeing could be set to lower medium-term expectations, while 3M's prospects could get brighter.
In 2024, 3M has spun off its healthcare business, Solventum, and raised cash in the process. Agreements were made to resolve legal issues and clarify the value of payouts. Moreover, the dividend cut will free up cash resources to restructure the business.
Meanwhile, the ongoing restructuring program appears to be improving margin performance, and there are signs of improvement in some of its key end markets like semiconductors and electronics.
The stage is set for Brown to lay out a plan to generate value for investors by implementing his strategic vision for the company. While there's still a lot of work for Brown to fully convince investors that 3M is on a sound track, the analyst price target of $115 seems reasonable, and with a 2.8% dividend yield, 3M could deliver double-digit returns for investors from here.
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Restoring value
Daniel Foelber (McDonald's): After briefly surpassing $300 per share earlier this year, McDonald's stock has fallen a surprising amount for a stodgy blue chip dividend stock. It's now down over 12% in 2024 -- making it one of the top five worst-performing components in the Dow Jones Industrial Average.
McDonald's is a somewhat challenging business to analyze, since the vast majority of its stores are franchised rather than company-owned. The franchise-heavy model means that McDonald's depends on its brand and the confidence that potential franchisees can make money, and therefore, should take on the risk of opening a new McDonald's location. It's an effective business model because it relies on steady inflows from licensing, royalties, lease agreements, and the performance of its company-owned stores. But it all falls apart if franchisees aren't generating acceptable returns.
McDonald's isn't at that dire stage yet. But years of price increases have exhausted customers and hurt McDonald's brand, which hinges on value. A comparison would be if Walmart overly raised prices, squeezed consumers, and lost its most important brand attribute -- which is saving customers money.
To boost perceived value, McDonald's is leaning heavily on its mobile app through promotions and deals -- a way to increase engagement while standing out from the competition. It is also releasing a $5 value meal on June 25 and running the promo for roughly a month.
McDonalds just opened its 6,000th restaurant in China and plans to have 50,000 restaurants by 2027. It currently has over 40,000 restaurants. For those stores to be successful, it has to restore its image as a top value-oriented fast food establishment.
Despite the challenges, McDonald's is too good a company with too cheap a valuation to ignore. The price-to-earnings ratio is just 21.5, and the dividend yield is 2.6%. McDonald's has raised its dividend for 47 consecutive years, making it one of the most reliable dividend stocks on the market.
McDonald's has its challenges and could be a poor performer in the near term. But patient investors are getting an excellent opportunity to buy this top Dow dividend stock on the cheap and collect a sizable amount of passive income while they wait for the business to turn around.
NYSE: MCD
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Energize your passive income stream with Chevron's high-yield dividend
Scott Levine (Chevron): While value investors may have considered piloting Boeing stock into their portfolios -- with it plunging nearly 30% since the start of the year -- the turbulence the company has recently endured related to safety issues has made the stock undesirable in many investors' eyes. But Chevron is another industry leader found in the Dow that value investors can rally around. The stock's enticing 4.2% forward dividend yield and track record of hiking the dividend for 37 consecutive years make it even more appealing.
The prospect of generating strong passive income from high-yield stocks is alluring, but smart investors know that it's important to verify that the high payouts are sustainable. One encouraging sign is the company's robust portfolio of assets in the Permian. From 2023 through 2027, Chevron expects to have 2,200 well locations in the Permian, and the company plans on growing this presence to more than 6,600 well locations in 2028 through 2040. This dedicated foresight to the company's long-term growth bodes well for income investors who seek assurance that the dividend can be sustained.
Another encouraging sign is management's auspicious outlook for free cash flow growth in the near term. From free cash flow (excluding working capital) of $10 billion in 2022, Chevron anticipates averaging more than 10% in annual free cash flow growth through 2027.
With shares of Chevron currently valued at about 7.7 times operating cash flow -- a discount to their five-year average cash flow multiple of 8.3 -- today seems like an especially good time to add this dividend powerhouse to your portfolio.
