If that S&P 500 With stocks rising sharply this year, it's easy to overlook the value of reliable dividend stocks. After all, what good is a 3% return when the market is up almost 20%?
However, the value of high-quality dividend stocks lies not in how they perform in a strong market, but in how they deliver regular quarterly payments regardless of what the market is doing. The best dividend-paying companies go one step further and increase their dividends every year, even during recessions. This allows investors to count on a growing source of income when they need it most.
Coke (KO -0.74%), Clorox (CLX -0.19%), and Goal (TGT -1.96%) have increased their dividends every year for decades. That's why it's worth buying every stock before the end of the year.
Image source: Getty Images.
Coca-Cola's moat was on display this year
Depending on who you ask, Coca-Cola stock could have a phenomenal or mediocre reputation. The simplest criticism is that Coca-Cola is a low-growth, underperforming stock that isn't worth holding. However, Coca-Cola supporters will argue that the company's track record of dividend increases and buybacks, as well as its wide moat, make it worth owning.
Coke's 10-year chart is certainly disappointing. Sales over the past 12 months are actually lower today than they were a decade ago. Meanwhile, net income is up just 26% in 10 years, and the stock is up just 43%, compared to a 150% gain for the S&P 500. However, the consumer staples sector tends to underperform strong bull markets. Coca-Cola's underperformance isn't that bad when compared to the sector rather than the S&P 500.
KO data from YCharts
Coca-Cola's redeeming quality is its history of dividend increases. Coke is one of the longest-reigning dividend kings, having paid and increased its dividend for 61 consecutive years. In the last decade alone, the dividend has increased by over 50%. And last year, Coke delivered strong profit growth thanks to price increases, demonstrating the strength of its brand and its ability to combat inflation.
Investors who value capital preservation over capital appreciation will likely be drawn to the fact that Coca-Cola's pros outweigh its cons. The trick is to get the stock at a good price. Coca-Cola's price-to-earnings ratio (P/E) is reasonable compared to the S&P 500. With a dividend yield of 3.1%, now is a good time to buy Coca-Cola if it fits your financial goals.
It's time to get Clorox back to normal
Earlier this fall, Clorox stock experienced a rapid and brutal sell-off, largely due to a cyberattack. The stock recently rebounded and is up 22% from its 52-week low. But if you look outside, the stock is essentially flat year-to-date.
Like Coke, Clorox has a portfolio of strong brands that support stable dividend increases. In addition to its flagship Clorox brand, Clorox owns Burt's Bees, Glad trash bags, Brita water filters, Kingsford charcoal and more. Given the product categories in which Clorox operates and the fact that Clorox's market cap is far smaller than Coca-Cola's, Clorox has slightly more growth potential than Coke. But Clorox is still primarily a dividend stock. And the stock simply isn't as battered as it was during the worst of the cyberattack scare.
Still, Clorox is a good value. The dividend yield is 3.4%. And while the P/E ratio is currently high, the company has made significant cost cuts and price increases that set the stage for strong bottom lines once Clorox fully recovers from the cyberattack.
Target is too cheap to ignore
Like Clorox, Target also suffered a massive sell-off, with its stock trading at just about $103 per share. Since November 1, Target is up 24.9%. But it is still declining in 2023 and has fallen by over 20% in the last three years.
Target has struggled with inflationary pressures, weak consumer spending on consumer goods, inventory problems and theft. The last few years have been an extremely challenging time for predicting buyer behavior, evolving from a wave of excitement during the pandemic to a more cautious period. High interest rates make borrowing more expensive and force consumers to spend within their means.
Unfortunately for Target, this means a potentially subdued holiday season, which is why Target has chosen to maintain a lean inventory rather than risk being overly optimistic and then having to implement steep markdowns after the holidays just to remove products from shelves .
Even after the stock's recent partial recovery, the yield is still 3.2%. Like Coke, it is a dividend king with over 50 consecutive dividend increases. Target also has more growth potential than Coke or Clorox. It has done a great job with its rewards program, curbside pickup, and e-commerce. Its margins are showing signs of improvement: The company's operating margin was 5.2% last quarter, a significant improvement from last year's epic margin collapse.
TGT Operating Margin (Quarterly) data from YCharts
Target is certainly not out of the woods yet. And it may take a while to fully recover. But the stock is still cheap, trading at a P/E ratio of 17.4. That's simply too low for a company with Target's brand strength and dividend track record.
Companies you can count on in 2024
Coke, Clorox, and Target are three stocks that are ideal for investors whose financial goals include generating steady passive income. Each stock yields over 3%, which is close to the 10-year Treasury risk-free rate of 4.2%. Only with stocks do you get the potential reward (and risk) that comes with investing.
High-quality dividend stocks like Coke, Clorox, and Target should prove to be worthwhile investments that combine dividend income and capital gains over time.