The S&P 500 and Dow Jones Industrial Average are less than 1% off their all-time highs, while the Nasdaq Composite is off by less than 5% from its peak. And yet, there are still plenty of stocks that are trading far below their peak prices, and many that have lost ground so far this year.
Among those stocks are oil and gas exploration and production company Devon Energy (DVN +0.54%), package delivery giant United Parcel Service (UPS +1.14%), and electrification technology company nVent Electric (NVT 0.32%). But these fool.com contributors think all three of these dividend stocks are worth buying now.
Image source: Getty Images.
Devon Energy offers a high yield and takes a conservative approach to its payout
Scott Levine (Devon Energy): When a stock tumbles, investors naturally want to know if there's something fundamentally wrong with the business that underpins the market's skepticism. That's certainly a question worth asking about Devon Energy, as its shares are currently trading about 19% below their 52-week high and down 64% from their all-time high. But even a cursory look at the exploration and production company shows that it's performing well, and the stock's decline is not predicated on something catastrophically wrong. Consequently, investors with longer investing horizons can sit back patiently while the stock recovers -- collecting the passive income provided by a dividend that yields 4.5% at the current share price.
The sharp decline in Devon Energy's stock belies the strong second-quarter financial results it recently shared. Surpassing its guidance, Devon Energy achieved daily oil production of 355,000 barrels, thanks to unexpectedly good results in the Delaware Basin. Moreover, thanks to the company's strong performance in the first half of the year and its planned acquisition of Grayson Mill in the third quarter, management upwardly revised its 2024 production guidance to more than 680,000 barrels of oil equivalent per day -- a 5% increase from the original forecast.
Devon divides its dividend payouts into fixed and variable distributions. In general, management aims for the fixed amount to equal about 10% of the company's operating cash flow with the variable amount based on a variety of other factors. Broadly speaking, though, management aims to return about 70% of free cash flow to investors -- a cautious approach that won't jeopardize the company's financial well-being.
For investors who are looking for dividend payments that come at a steady rate, Devon Energy isn't the best choice since its payouts are based on its performance. However, those who are comfortable reaping the rewards when it's strong -- and weathering the temporary downturns during which it's not -- should consider picking up shares.
NYSE: DVN
Key Data Points
UPS has an enticing dividend
Daniel Foelber (UPS): Shares of the package delivery giant surged during the pandemic as vast numbers of consumers shifted much of their purchasing from in-store shopping to online ordering. But the stock is now down 45% from its all-time high and hovering around a four-year low.
UPS thought that the growth in demand for its services would last. It did not.
Earlier this year, UPS cut its once-optimistic forecast and charted a more realistic path forward based on a gradual rise in package delivery demand and a new three-year plan. Now, UPS must deliver on its promises. So far, it hasn't done so.
The logistics giant's just half a year into this new plan, and its results have already been disappointing. The good news is that UPS expects to return to earnings growth in the second half of the year. On its second-quarter earnings call, management also made a point of noting that its performance so far this year was heavily impacted by front-loading certain costs of the new labor contract it signed about a year ago with its largest union. But given the company's consecutive earnings misses, investors are understandably not giving it the benefit of the doubt -- hence the abysmal performance of the stock.
There's no sugarcoating that UPS faces an identity crisis. It still hasn't found a balance for what its new normal will look like, and investors have lost faith in management's ability to forecast demand trends -- which is a problem, given that poor forecasting can result in major excess labor and fuel costs or missed opportunities.
Despite the uncertainty, there is reason to believe that UPS stock has fallen far enough. The stock trades at a price-to-earnings ratio of just 20.9 -- which is already reasonable. But that's an especially attractive valuation considering that its earnings have been falling for over two years now, and its 12-month trailing earnings are now roughly the same as they were five years ago.
If UPS can return to growth in the coming years, we could look back at this time as an excellent buying opportunity. Some investors may want to wait for concrete signs that UPS is turning the corner. But those who are willing to take a stake in UPS now will benefit from a dividend that yields 5.1% at the current share price -- which is a worthwhile incentive to hold the stock and endure this volatile period.
nVent's electrifying future
Lee Samaha (nVent Electric): This electrical connection and protection solutions company's stock is down 22.7% from its recent all-time high, and I think its sell-off has created a decent buying opportunity for an attractive long-term story.
nVent's products (enclosures, electrical, and fastening solutions) are a pick-and-shovel way to play the "electrification of everything" megatrend. There are no data centers, renewable energy, industrial automation, 5G communications, or smart buildings/infrastructure without electrical infrastructure, and that means investments in the type of solutions sold by nVent.
As such, the stock represents a backdoor way to play an exciting thematic trend. Moreover, management is strengthening the company's exposure to the theme through acquisition and divestitures. Over the last month, nVent completed the $695 million acquisition of custom-engineered control building solutions company Trachte. In addition, nVent announced the $1.7 billion divestiture of its mission-critical electrical thermal management solutions business.
As CEO Beth Wozniak noted on the company's second-quarter earnings call, "The addition of Trachte further strengthens our solutions in high-growth verticals with approximately 85% of its sales in power utilities, data centers and renewables."
nVent's second quarter results were solid enough, and management continues to expect full-year organic sales growth of 3% to 5%, with adjusted earnings per share in the range of $3.23 to $3.29. Based on that, it trades at slightly more than 20 times estimated earnings.
While the dividend yield of 1.2% isn't anything to write home about, its payout of $0.76 per share is well covered and gives management plenty of room for significant increases in the future.
