The S&P 500 (^GSPC -1.60%) is offering investors a tiny yield of just 1.2% today. If you think you are being starved of dividend income, well, that's because you are. But you can do much better than 1.2% with these unloved stocks that are trading near their 52-week lows. Bottom fishing with these industry giants, however, could net you both good businesses and lofty yields of up to 6.4%.
1. Merck has proven to be a resilient dividend stock
Merck (MRK 1.51%) has increased its dividend annually for 15 consecutive years. That's a nice streak, but it isn't the whole story. Prior to the dividend streak, the dividend was paused for a spell even as prime pharmaceutical competitor Pfizer cut its dividend. A hike every year would be best, but avoiding a cut is pretty darn good.
Then there's the dividend yield, which at roughly 3.8% is attractive relative to the market and the average healthcare stock, at a yield of around 1.8%. There are a number of issues facing Merck today, including patent expirations, its drug pipeline, and a shifting regulatory landscape. That has the stock down near its 52-week lows and the yield elevated.
Merck is an industry giant that has the wherewithal to invest in its business, buy smaller competitors with interesting products, and to survive through regulatory changes. It has, in fact, done all of these things before and, notably, without cutting the dividend. If you are a long-term dividend investor, this is likely a buying opportunity.
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2. Hormel is muddling through a rough patch
Hormel Foods (HRL 0.16%) is a Dividend King, with more than five decades of annual dividend increases behind it. The stock is currently unloved because the food maker isn't hitting on all cylinders today. That has the shares down near their 52-week lows.
But the story is even worse if you go further back, since the shares are also near their lowest levels of the past three-, five-, and 10-year periods, too. The yield is a historically high 4% or so right now.
There's no quick fix for Hormel, which is a protein-focused maker of packaged foods. However, the company has plenty of time to work on a solution because The Hormel Foundation basically controls the company.
This philanthropic organization was created by Hormel's founders to ensure it remained an independent company and to give money to good causes. It uses the dividends Hormel pays to support its giving, so it wants the business to be a reliable dividend generator, just like you do.
Hormel is really a brand manager in the consumer staples space. The company is a skilled innovator and marketer, and is reworking its brand portfolio while also working on controlling costs. These are all the right things to do -- they just take time. If you don't mind collecting an attractive yield backed by a growing dividend while you wait, Hormel could be for you.
3. United Parcel Service is making tough choices
The last stock up here has the highest dividend yield, recently at 6.4%. The dividend has been increased annually for 16 years. But investors are clearly worried about United Parcel Service's (UPS -1.86%) business. Indeed, the yield is very high on an absolute level and relative to the company's history, thanks to the fact that the stock is well off of its 52-week highs.
There's good reason to be worried. The package delivery company's performance suffered after the coronavirus pandemic, with volumes dropping and margins compressing. Management quickly started to revamp the business, selling assets and cutting costs as best it could, noting that it also had to deal with an expensive new union contract. And just as the company appeared to be turning a corner, management announced that it was proactively reducing its business with its largest customer, Amazon.
But the big picture is the more important one here. First, UPS' business is likely to see increased demand over time as online shopping continues to grow. Second, it is willingly taking on some near-term pain so it can refocus around its most profitable business (the business it does with Amazon is very low margin). And third, streamlining the business, while costly in the near term, will set the company up for better long-term financial results.
Essentially, UPS is an attractive, high-yield turnaround stock if you can handle that type of investing.
Bottom fishing comes with risks -- tread carefully
UPS, Hormel, and Merck are all industry-leading companies with strong dividend histories and good long-term business prospects. If you are looking for bargains among companies trading near 52-week lows, they should each be of interest to you.
That said, you can easily find higher-yielding stocks that are down and out. But you need to be careful when you are bottom fishing, because you'll be hard-pressed to find companies that are equally attractive from a business perspective.
