Coca-Cola and These Two Red-Hot Dow Dividend Stocks Are Up 10% to 22% in 3 Months and May Still Be Worth Buying in October

In early 2024, the broader indices were driven higher mainly by megacap growth stocks. But the market’s leadership has changed in recent months, with misplaced dividends and value stocks posting sizeable gains.

For example, Nvidia fell 3.1% over the past three months, while S&P 500 is increasing by 3.2%, and the Dow Jones Industrial Average increased by 7.1%. Meanwhile, Dow components Coca cola (NYSE: KO), Home Depot (NYSE: HD)and McDonald’s (NYSE: MCD) they are even higher.

Here’s why these three blue chip dividend stocks could be solid October buys for those looking to generate passive income.

Coca-Cola returns to growth

Coca-Cola is a great example of why a stodgy, low-growth company can be a great investment when it overcomes investor objections.

Coca-Cola is a consolidated, mature company with a global beverage portfolio. Investors likely gravitate toward buying and holding Coca-Cola stock for its stable earnings and dividend growth, and because it can deliver regardless of what the economy or the rest of the stock market is doing. Because of this, Coca-Cola doesn’t need to deliver skyrocketing double-digit earnings growth to impress investors—it just needs to grow its earnings enough to justify reasonable dividend increases while maintaining a strong balance sheet.

Since Coca-Cola’s most recent dividend hike was a healthy 5.4% increase and the company is expected to report record earnings this fiscal year, it’s understandable why the stock has tumbled in recent months.

After its sales collapsed during the height of the pandemic, Coca-Cola has done an excellent job of navigating inflationary pressures. The company’s pricing power has been at its best as it continues to make the most of its growing portfolio of soft drinks, coffee, tea, juices, energy drinks, water and sparkling water.

The rise in Coca-Cola’s stock price lowered its yield to 2.7% and pushed its price-to-earnings (P/E) ratio above historical levels. However, Coca-Cola is well positioned to maintain high margins and pass on profits to shareholders.

Coca-Cola may pull out due to valuation concerns. However, the underlying business is in great shape, suggesting that Coca-Cola is still a good buy for long-term investors looking for reliable dividend stocks.

The worst of the Home Depot recession may be over

Home Depot’s results have been relatively weak in recent years. In the company’s most recent report, it cut its full-year guidance, expecting lower sales and earnings in fiscal 2024 compared to fiscal 2023. Despite the bleak outlook, Home Depot was one of the hottest stocks in the Dow in recent months and just hit a new all-time high on October 2nd.

The story continues

The two biggest factors driving Home Depot higher are that it was a cheap dividend stock in an otherwise expensive market and that lower interest rates could be a boon for the housing market and in turn the home improvement market of housing. As you can see in the following chart, Home Depot’s P/E ratio has hovered around its five-, seven-, and 10-year average levels, but has since risen directly with the higher stock price.

Lower mortgage interest rates could spur an increase in consumer spending, benefiting Home Depot’s anticipated results. But it’s worth understanding that the rise in Home Depot stock isn’t based on what the company has done, but rather what it could do in more favorable economic conditions.

Given the expensive valuation, Home Depot is no longer as compelling a buy. Still, it could be a good dividend stock to buy and hold for the long term.

The company has a proven track record of growing earnings and dividends at impressive rates and investing throughout the cycle. Home Depot made a massive $18 billion acquisition earlier this year — one of the largest in its history. He did so with the understanding that the move could take a while to pay off. There aren’t many companies that can make that much of a splash during an industry downturn.

With a dividend yield of 2.2%, Home Depot could still be a good buy for investors who like the company’s strategic decisions and think it could be a spiraling spring for a housing market comeback.

A healthier consumer would be great news for McDonald’s

In July, McDonald’s was knocking on the door of a new 52-week low. Investors became concerned that the company was losing its pricing power and customers were gravitating toward more affordable options. But McDonald’s has climbed nearly 20 percent higher in the past three months, hitting a new 52-week high.

The move may suggest McDonald’s has turned the corner. But management lacks confidence in the company’s near-term prospects. People are still selective with their purchases, and lower interest rates are unlikely to change this behavior overnight.

It’s also worth understanding that McDonald’s is not a company that should be valued based on traditional metrics like the P/E ratio, as only 5% of its stores are owned and operated by the company. The franchise business model can lead to inconsistent earnings, so it’s better to look at McDonald’s revenue and operating margin over a long period of time.

As you can see in the chart, McDonald’s sales have rebounded from pandemic lows and the company has increased margins, indicating it has plenty of room to cut prices if necessary or expand promotions like its $5 meal deal.

With McDonald’s, it appears that investors are taking an ultra-long-term view of the stock and are looking at where the company will be at least a year from now, rather than where it is today.

Another catalyst that could drive stocks higher is China. China recently announced a stimulus package aimed at boosting economic growth and spurring consumer spending. Given its presence in the country, a potentially stronger Chinese economy is great news for McDonald’s.

McDonald’s isn’t the huge buy it was a few months ago, but it still stands out as a dividend stock worth buying now. McDonald’s recently raised its dividend by 6% to $1.77 per quarter, or $7.08 per year — representing a forward yield of 2.3%. That’s not a bad source of passive income when you consider that the S&P 500 is only 1.3%.

3 reasonable buys for long-term investors

Coca-Cola, Home Depot, and McDonald’s are three phenomenal businesses that were bargains but experienced significant increases in stock prices in a relatively short period of time. Whenever a stock makes a big move based on expectations, it puts pressure on the company to deliver or face a decline in its stock price.

While all three companies aren’t as good a deal as they were at the start of the year, they aren’t necessarily too expensive for investors looking for blue chip dividend stocks. In fact, these are exactly the kind of companies that investors can count on to persevere through a downturn.

If you’re willing to invest in quality, it might be wise to take a close look at all three stocks, keeping in mind that the current rally could cool off soon.

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Daniel Foelber has no position in any of the listed stocks. The Motley Fool has positions in and recommends Home Depot and Nvidia. The Motley Fool has a disclosure policy.

Coke and These 2 Red-Hot Dow Dividend Stocks Up 10% to 22% in 3 Months and May Still Be Worth Buying in October was originally published by The Motley Fool