This has been another great year for the broader stock market, with the S&P500 And Nasdaq Composite both up more than 20% this year. And with only one quarter left in 2024, the broader indices could go nowhere or even decline slightly, and it would still be an excellent outcome considering the long-term average annual return in the S&P 500 is around 10% is.
New all-time highs are great if you’ve already invested a good amount of money in the market, but it’s a challenge if you want to put new capital to work without overpaying. The good news is that there are plenty of dividend-paying stocks and exchange-traded funds (ETFs) that still represent good value.
PepsiCo (NASDAQ: PEP) And American States Water (NYSE: AWR) are two Dividend Kings who have paid and increased their dividends for more than 50 consecutive years, while the Global X SuperDividend ETF (NYSEMKT: SDIV) has international exposure to a variety of high yield names. Here’s why these three foolish.com contributors think they’re worth a look.
A purchase, even if the results did not impress
Daniel Foelber (PepsiCo): The S&P 500’s price-to-earnings (P/E) ratio is 29.9, which suggests the market is expensive compared to historical averages. As stock prices have outpaced dividend growth, the S&P 500’s yield has fallen to just 1.3%.
Investors looking for value and passive income can often rely on safe and stable sectors such as consumer staples, healthcare and utilities. But even those sectors are hitting record highs, which has driven up their valuations and lowered their returns.
PepsiCo is a rare blend of reliability, high yield and value. It has had 52 consecutive years of dividend increases, currently yields 3.2% and has a price/earnings of 24.7. For comparison, a consumer staples ETF has a yield of 2.6% and a price/earnings of 28.3.
When a well-known blue chip stock is noticeably undervalued relative to its peers, chances are it’s not a fluke. While PepsiCo has done a good job dealing with inflation and price-conscious consumers, its sales and profit growth have been quite disappointing. As you can see in the following chart, PepsiCo’s dividend has more than doubled over the past decade, but its revenue and profit growth have been relatively poor.
The stock price has gone virtually nowhere over the past three years compared to the solid gains in the consumer staples sector. So some investors may wait for a noticeable improvement in the underlying business before buying the shares.
This fiscal year, PepsiCo is targeting earnings per share growth of at least 8% at constant exchange rates, which would be a step in the right direction. But the company likely still has a long way to go before it can exceed investor expectations.
PepsiCo may not be performing well right now, but the company’s supply chain, marketing and distribution give it a major advantage in growing existing brands and innovating or acquiring new ones.
This is an excellent time for patient investors to buy PepsiCo if they have confidence in the company’s international portfolio of foods and beverages, including Frito-Lay and Quaker Oats.
This utility’s reign as dividend king is unlikely to end anytime soon
Scott Levine (American Water): Companies that have earned the title of Dividend King belong to an elite group that has demonstrated impressive commitments to shareholders. Among this group, American States Water is a utility that dominates, with the longest streak of consecutive annual dividend increases: 70 years.
Those looking to generate a reliable stream of passive income for decades will definitely want to consider dipping their toes into American States Water and enjoying the 2.3% forward yield dividend.
A key reason why the utility is so attractive for its dividend potential is its business model. It operates mainly on regulated markets and is guaranteed a certain return on its investments. It provides water and wastewater services under 50-year contracts to 12 U.S. military bases—another encouraging sign for the company’s fortunes. And since many military bases have not been privatized, management sees plenty of opportunities to achieve growth with these types of activities.
Looking at its recent performance, investors will find appeal in the reliable nature of the utility’s operations. Over the past five years, adjusted earnings per share have experienced a compound annual growth rate (CAGR) of 9.8%, from $1.72 in 2018 to $2.75 in 2023.
And management’s focus on increasing payouts at the same pace shows a financially responsible approach to rewarding shareholders. Over the same five-year period, American States Water increased its dividend to a CAGR of 8.8%, a period during which it averaged a 56.5% payout ratio.
American States Water deserves serious consideration for those who would like to find a conservative approach to generating a lifelong stream of passive income.
A dividend ETF that yields 6.1%
Lee Samaha (Global X SuperDividend ETF): It’s never easy to pick winners in the high-yield stock sector. After all, there is often a reason why the market assigns a high yield to a stock, and this usually reflects a concern that the dividend is not sustainable. As such, it makes sense to diversify stock-specific risk by holding multiple stocks.
While this may prove costly in practice, it is always possible to buy into a high-yield exchange-traded fund (ETF) such as the Global X SuperDividend ETF.
The fund’s strategy is to buy 50 of the highest-yielding US stocks and pay a monthly distribution to investors. With a current yield of 6.1% and a reasonable expense ratio of 0.45%, the fund offers a good way to gain exposure to high-yield equities.
As always, any mechanically based strategy tends to result in an unintended style or sector bias. In this case, following a high-yield strategy results in nearly 67% of the ETF’s investments being in utilities, real estate, energy, and consumer staples.
In contrast, only 2% are active in information technology and 1.7% in consumer durables. But if you want high-yield stocks, monthly income, and exposure to interest rate-sensitive stocks, the Global X SuperDividend ETF is a good option and can generate solid returns over the long term.
Should You Invest $1,000 in PepsiCo Now?
Consider the following before buying shares in PepsiCo:
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no positions in the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
A lifetime of passive income is hiding in plain sight with this ETF and these two no-brainer dividend kings was originally published by The Motley Fool
