Investors often use the S&P 500 to track the performance of the stock market. But the index's real purpose is to be broadly representative of the U.S. economy; the committee overseeing the index selects 500 of the largest and most economically important U.S. companies for inclusion. That vetting process makes the S&P 500 a good fishing ground for stocks to buy.
Right now, two magnificent S&P dividend stocks are deeply out of favor despite remaining important, and profitable, businesses. Here's why you might want to buy Realty Income (O +0.21%) and Hormel Foods (HRL +0.35%) and hold them forever.
Realty Income is a high-yield tortoise
The truth is that Realty Income is probably one of the most boring companies you'll find in the real estate investment trust (REIT) sector. That, however, has long been one of the company's goals. It actually trademarked the nickname "The Monthly Dividend Company," which speaks to its commitment to its payouts.
Image source: Getty Images.
At this point, management has increased the dividend annually for 30 straight years, and also for the last 110 quarters. If you are looking for a dividend stock that is as reliable as a quartz watch, Realty Income should be on your buy list. Add in a 5.6% dividend yield at the current share price -- well above the S&P 500 index's scant 1.3% yield -- and you might want to move it from your buy list and right into your portfolio.
The business backing those payouts is quite solid. Realty Income owns more than 15,600 single-unit properties across the United States and Europe, renting them out under triple net leases to companies across the retail and industrial sectors. It is the largest competitor in its space by a wide margin, which gives it scale advantages in raising growth capital and on the acquisition front.
NYSE: O
Key Data Points
However, the REIT's large scale can be a headwind, too -- it takes a lot of new properties to move the needle for it financially. But slow and steady probably won't be too big an issue for conservative income investors when you combine it with the lofty yield. And right now, this S&P 500 constituent is down by about 25% from the peak it reached prior to the coronavirus pandemic despite its reliable dividend growth. That's a buying opportunity if you think in decades rather than days.
Hormel Foods is working through a tough patch
Hormel Foods is not just in the S&P 500 index. It also happens to be on the list of Dividend Kings -- the small and exclusive club of companies that have increased their payouts annually for more than 50 consecutive years. Those elite companies have proven over time that they know how to manage through difficult periods while still rewarding investors well. The current period is one of those difficult times for Hormel, which is why the stock has fallen around 40% from its 2022 highs.
The price drop has pushed Hormel's dividend yield up to 3.8%, near its historical peak, which is why long-term dividend investors should be looking at the stock right now. But don't buy it before considering the reasons why this S&P 500 stock is so unloved on Wall Street at the moment.
The first is that Hormel is having some difficulties in passing all of its rising costs on to consumers. But other headwinds include the ongoing outbreak of avian flu, a slow rebound in China, and some early trouble with its acquisition of Planters. None of these problems individually is likely to upend the company's business over the long term, but it's facing them all at once.
That's far from ideal, but even so, it seems likely that this Dividend King will muddle through like it has so many times over the past five decades.
NYSE: HRL
Key Data Points
For example, Hormel is leaning into product innovation, which has been a strong suit for the company. It is also focused on increasing its efficiency as it works to streamline its operations, which will help reduce costs. And it is reworking its management team, bringing in new blood with experience both inside and outside of Hormel. That leadership team should be able to focus on the long term, too, because the company's largest shareholder is The Hormel Foundation, a philanthropic organization with a specific goal of ensuring the long-term survival of Hormel the company.
Simply put, food maker Hormel can take its time and do the right things for the business without worrying too much about what Wall Street thinks about its near-term results. If that sounds like the kind of business you want to have in your portfolio, then you might want to jump on this Dividend King despite the headwinds it faces.
Sometimes buying when others are selling can make a lot of sense
Just because a company's stock price has fallen doesn't mean Wall Street is correctly assessing its long-term merits. Often, traders are taking a short-term view of things and ignoring both the company's history and its future potential. Realty Income and Hormel are both down as stocks but not out as companies. And that makes each one worth a close look for dividend investors with a buy-and-hold mentality.
