3 Dividend Stocks to Double Right Now

Stocks that pay dividends always attract the interest of investors. However, with long-term interest rates falling and the Federal Reserve poised to cut short-term rates, earning equity income looks especially appealing.

Not all stocks present the same buying opportunity, of course. It is important to look beyond the dividend yield to ensure that the company can continue to make payments. Even better, you should be looking for those growing payouts.

The three stocks below have all lagged the overall market recently, but they present a good opportunity to buy now — or add shares if you already own them.

1. PepsiCo

PepsiCo (NASDAQ: PEP) has a stable of well-known and popular beverage, snack and food brands. These include soda, chips, granola bars and cereals sold under the Pepsi, Aquafina, Doritos and Quaker banners, to name a few.

However, the stock has lagged the overall market over the past year. The stock gained 1.5% versus about 21% for S&P 500 during this period. This is likely because PepsiCo’s revenue growth has been sluggish of late. Adjusted second-quarter revenue rose 1.9% after removing foreign currency translation. However, food volume fell by 2 percentage points and beverages remained flat.

The low volume is likely due to consumers stressed by higher prices. But this will no doubt prove temporary as inflationary pressures fade. However, despite weak revenue growth, PepsiCo’s adjusted operating profit rose 10%. Management expects revenue to grow 4% this year and earnings per share to rise at least 8%.

Meanwhile, PepsiCo shareholders will enjoy a dividend yield of 3.1% versus 1.3% for the S&P 500. And the company has reliably grown payouts. The board has raised dividends for 52 consecutive years, including a 7% increase earlier this year. That makes stocks a dividend king. PepsiCo, with a payout ratio of 73%, can comfortably afford its payouts.

2. Target

Aim (NYSE: TGT) differentiates itself from retail competitors such as Walmart offering brands sold exclusively in its stores and on its website. They account for about a third of Target’s sales.

There have been some well-publicized inventory mistakes where management had too much stock of higher priced items. Its subsequent reduction temporarily hurt Target’s gross margin and profitability.

Fast forward, and these steps appear to have put the company in a strong position to benefit from a stretched consumer base. Fiscal second quarter same-store sales (comp.) rose 2%. Store comps rose 0.7% and digital rose 8.7%, helped by its delivery and same-day delivery services. And its gross margin improved 1.9 percentage points to 28.9%. This covered the period ending August 3.

The story continues

However, despite the positive earnings report, the stock price outperformed the S&P 500 year-to-date. Shares of Target rose 6.2%, while the S&P 500 gained 13.4%.

This is likely due to investor concerns about consumer spending. But this venerable retailer has proven it can pivot to what consumers want, and they’ll continue to flock to Target. The business also generates plenty of free cash flow (FCF). For the first half of the year, Target’s FCF was $2 billion. That easily covered the $1 billion in dividends.

In July, the company announced a roughly 2% increase in dividend payouts, marking 53 consecutive years of an increase. Target has paid dividends since 1967. The stock has a dividend yield of 3%.

3. Home Depot

Home Depot (NYSE: HD) generates the highest sales among home improvement retailers. Serving consumers and professionals, its sales totaled nearly $153 billion last fiscal year (ended Jan. 28), compared with $86 billion for its rival. Lowe’s Companies.

This size offers certain advantages such as brand recognition and economies of scale in areas such as procurement. However, Home Depot’s results depend somewhat on the business cycle, as people upgrade their homes when they feel comfortable with their financial situation.

Home Depot’s recent results have been weak as homeowners struggled with higher interest rates and took a break from major projects in the early days of the pandemic. Its companies declined, including a 3.3 percent decline in the second quarter.

Weaker sales have been reflected in the share price, which is up just 4.4% over the past year. That’s a long way from the broader S&P 500.

Although the timing may be uncertain, people will undertake large projects at some point. They won’t hold back projects forever, and borrowing costs are likely to become more subdued as the Federal Reserve looks set to cut interest rates at its meeting later this month.

Still, patient investors can sit back and collect dividends. That’s because Home Depot continues to generate plenty of FCF. In the first half of the year, FCF was $9.3 billion and it paid out $4.5 billion in dividends. Home Depot has raised its dividend annually since 2010, and the stock has a dividend yield of 2.5%.

Should you invest $1,000 in PepsiCo right now?

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot, Target and Walmart. The Motley Fool recommends Lowe’s Companies. The Motley Fool has a disclosure policy.

3 Dividend Stocks to Double Up on Right Now was originally published by The Motley Fool