2 Dividend stocks down more than 40% to buy before the pullback

No matter what happens to the stock market, it’s always comforting to own shares of companies that pay increasing dividends to shareholders. Let’s look at two industry leaders that are trading well above their highs and delivering the highest returns in a long time.

1. Nike

NIKE (NKE 0.06%) recently announced that longtime company veteran Elliott Hill will take over as president and CEO effective October 14. The management change comes amid a lackluster earnings performance this year that has sent the stock down 51% from its previous all-time high. Hill’s hiring is seen as a positive catalyst for the brand’s turnaround, as the stock has risen 7% since the announcement.

Hill previously served as President of Nike’s Consumer and Market Division, where he was instrumental in helping Nike expand its business globally. While investors won’t know what specific strategy Hill will implement until he’s on the job, Nike’s decision to hire a former executive could be just what it needs to turn things around.

Nike’s revenue fell 2% year-over-year in the most recent quarter, but there were arguments revealing how Nike can emerge from the crisis. Management noted that core categories such as basketball and fitness saw growth in the quarter, but that was offset by weakness in lifestyle products and the Jordan brand. This shows that Nike can perform much better if management invests more in its performance products, where there is ample opportunity for growth in a $300 billion athletic apparel market.

Nike has paid a growing dividend for 22 consecutive years and paid out 38% of its earnings in the past year. That brings the stock’s forward dividend yield to 1.70% — higher than 1.26% S&P 500 average. Investors should expect the new CEO to implement an effective performance improvement strategy. By this time next year, the stock should be trading higher.

2. UPS

UPS (UPS 0.70%) has paid a dividend to shareholders for 25 years, reflecting many years of solid financial performance. But the business is struggling to grow revenue as customers trade up to lower-priced delivery options. With the stock down 45% from its previous peak, investors can get the stock at a historically high dividend yield.

Wall Street has low expectations for UPS. Revenue fell slightly in the second quarter, and lower margins contributed to a 30% year-over-year drop in operating profit. But these results are already evaluated in stock. If you’re buying dividend stocks, the most important thing is perspective. Management expects to generate free cash flow of $5.8 billion for the full year, which is expected to fund a planned dividend payout of $5.4 billion.

The current quarterly dividend is $1.63 per share, bringing the stock’s forward dividend yield to 5.05%. This is very attractive for a top global shipper. While there’s always a chance the dividend could be cut if business conditions worsen, that seems unlikely based on management’s free cash flow guidance and the company’s recent recovery in volume growth.

UPS reported an increase in U.S. volume last quarter — the first quarter of volume growth in more than two years. Management credited this improvement to new e-commerce customers coming into the UPS network, highlighting a long-term opportunity for the company. It also continues to invest in the future through its planned acquisition of Estafeta, a leading small package company in Mexico. This is a strategic move by UPS to position itself for growth as more customers move distribution closer to the US

Buying stocks of industry-leading companies when they are experiencing temporary growing pains can lead to excellent returns. Nike and UPS are well-established companies that will be around for many years, paying dividends to investors.