Warren Buffett has a great quote on the importance of being patient:
“The stock market is a device for transferring money from the impatient to the patient.”
This concept is never more important or germane than right now. Why? Well, volatility has been off the charts.
And a lot of people get spooked by this volatility, selling out of stocks precisely when they should be buying stocks. But here’s the thing. The market has been in a downtrend for a while.
And the impatient can’t see past this short-term volatility. But long-term, patient investors are all too happy to scoop up quality assets on the cheap. Because they know what these assets are worth.
This is even more true for long-term dividend growth investors, like myself. Price and yield are inversely correlated, all else equal. So lower prices result in higher yields.
That’s even more passive dividend income on the same invested dollar. Speaking of lower prices, some dividend growth stocks have been absolutely hammered recently.
And these could be just the buying opportunities that patient, long-term dividend growth investors are looking for.
Today, I want to tell you about five dividend growth stocks that are down more than 20% from their recent highs. Ready? Let’s dig in.
The first stock we have to talk about is Archer-Daniels-Midland (ADM).
Archer-Daniels-Midland is a multinational food processing and commodities trading corporation with a market cap of $41 billion.
You’ve heard of Big Tech. Well, Archer-Daniels-Midland is part of Big Agriculture, or Big Ag. This company forms part of the backbone of the global food supply. We’re talking about taking crops and processing them into a variety of food products that billions of people end up consuming in a variety of ways every single day. Boring? Maybe. Critical? You betcha.
But that critical nature is easy to forget about and take for granted when times are good. But when times aren’t so good, like when war breaks out in Eastern Europe? The memory becomes, shall we say, less foggy. Meanwhile, want to guess what constantly reminds shareholders of how critical the business is? Yep. You guessed it. The dividend that Archer-Daniels-Midland reliably pays and consistently increases.
The Big Ag company has increased its dividend for 47 consecutive years.
Yep. This is a vaunted Dividend Aristocrat. How do you think they’ve been able to increase the dividend annually for nearly 50 straight years? By running a great business founded on constant and increasing demand for the products they provide. The 10-year DGR is 8.5%. And with that high-single-digit dividend growth, you get a yield of 2.2%. With the payout ratio sitting at only 29.5%, investors can be rest assured that the dividend remains safe and positioned to continue growing for years to come.
This stock has recently been slammed – now down 27% from its 52-week high.
Remember what I just said about how the market suddenly collectively remembers how important businesses like this one truly are when times aren’t so good? Well, this stock took off like a rocket after Russia invaded Ukraine – soaring 30% between late February and late April, hitting a 52-week high of $98.88. But it’s come back down to earth, and shares are now trading for about $72/each. Most basic valuation metrics have now become much, much more reasonable.
That includes the P/E ratio of 13.3, which compares favorably to its own five-year average of 15.9. Personally, I’d like to see the stock even cheaper. But it’s now at least worthy of being on one’s radar after a period of what looked like irrational exuberance.
Next up? Let’s talk about Chevron Corporation (CVX).
Chevron is a multinational energy corporation with a market cap of $270 billion.
Okay. Here we go again. Another business that provides something that’s absolutely critical to society. Another business that’s been, arguably, taken for granted for quite a while. Actually, I take that back. They haven’t been just taken for granted. They’ve been vilified by a segment of people out there. Say what you want about oil & gas, but the truth is that we need these energy products in order to keep our modern-day society running properly.
That is, until such time that alternative energy sources become more abundant and reliable. This is true today. It’ll be true tomorrow. And I suspect it’ll be true for at least a few more decades. That sets the company up to continue pumping out their big, safe, growing dividend to shareholders.
The oil & gas giant has increased its divided for 35 consecutive years.
Another Dividend Aristocrat, which is another thing that Chevron has in common with Archer-Daniels-Midland. Dividend Aristocrats are the crème de la crème of dividend growth stocks. They must have at least 25 consecutive years of dividend increases. How do you do that? Again, you have to run a top-notch business model focused on bringing the world what it consistently demands more of. Their 10-year DGR of 5.6% is okay, but it’s the 4.1% yield that really shines here. Chevron has always been a great income producer. And, with a payout ratio of 53.4% showing a well-covered dividend, it should remain one for a long time.
This stock’s 25% drop could be your chance to invest alongside Warren Buffett.
That’s right. Through his conglomerate, Berkshire Hathaway Inc., Buffett has over $20 billion invested in Chevron. And this isn’t some old investment. He’s been buying Chevron stock recently. In fact, we’ve been covering this all along, with our last video on this subject released only a few months ago. Chevron’s 52-week high of $182.40 is in the rearview mirror now. The stock is now priced at about $138.
This 25% fall has created a much more acceptable valuation, as shares are barely priced higher than where they were in early 2020 before the pandemic hit – despite the price of oil being much higher than it was back then. Earnings for Chevron can be super lumpy, so it’s hard to make direct comparisons. But the P/E ratio of 12.9 is low enough so that even a 50% haircut to earnings still doesn’t put it back to its five-year average of 27.4. Take a look at Chevron.
The third stock to have a discussion about today is Essex Property Trust (ESS).
Essex Property Trust is an apartment community real estate investment trust with a market cap of $17 billion.
I love this business model for a very simple reason: Essex Property Trust is providing its customers with the very basic necessity that is shelter. There’s a lot of different types of real estate out there. Some is rather discretionary. But shelter? Not so much. Now, Essex Property Trust does own and manage some higher-end apartment communities. So it’s not shelter in the sense of subsistence.
However, because it focuses on unique West Coast markets, where a prolific number of high-income renters can be found, and where regulatory and geographic hurdles conspire to limit supply, the REIT stands to do well for years and years into the future. That goes for the dividend, too.
The REIT has increased its dividend for 28 consecutive years.
Yet another Dividend Aristocrat. And why is that? Because we have yet another super simple business model providing people with something they practically can’t live without. The 10-year DGR of 7.2% is solid. As is the stock’s yield of 3.3%. Plus, the payout ratio is only 63.1%, based on midpoint guidance for this year’s FFO/share. Really, really good dividend metrics. It doesn’t necessarily wow you in any one area. Instead, it’s just a nice balance right across the board.
This stock’s 27% drop could be a tremendous long-term buying opportunity.
In fact, I feel so strongly about it being a tremendous long-term buying opportunity, I’ve been doing some buying myself. Indeed, we recently put out a video highlighting why I’ve been adding this high-quality Dividend Aristocrat to the FIRE Fund. The stock reached its 52-week high of $363.36 in the spring. The stock is now down around the $265 area.
I’ll admit, it did look expensive at the 52-week high, which is why I wasn’t going anywhere near it. But down here? The valuation has become a lot more appealing, which is why I’ve been buying. With the P/CF ratio of 16.9 being well off of its own five-year average of 21.6, I see the stock heading higher. Before it does, though, we have a chance to load up and lock in that nice market-beating yield. This REIT is worth consideration here.
The fourth stock I have to highlight today is Magna International (MGA).
Magna is a multinational mobility technology company with a market cap of $17 billion.
Magna manufactures a number of components for almost every single major OEM auto manufacturer. We’re talking about body structures, control modules, trim, lighting, etc. In fact, Magna is so proficient and prolific, they could almost manufacture entire cars all by themselves. Their expertise and breadth are nearly unrivaled. In a world where mobility is becoming increasingly important, especially with the rise of EVs, Magna is becoming more important. That bodes well for their ability to continue growing the business and the dividend.
The manufacturer has increased its dividend for 13 consecutive years.
Their 10-year dividend growth rate is 13.2%. Along with that strong double-digit dividend growth, you get a nice market-beating 3.2% yield. That yield, by the way, is 70 basis points higher than its own five-year average. With a payout ratio of only 43%, this is a well-covered dividend. Any near-term bumps in the economic road could hit Magna’s earnings, but this low payout ratio offers a healthy cushion.
This stock has been slammed. It’s now down 37% from its 52-week high.
Now, to be fair, this stock looked grossly overvalued at its 52-week high of $90.15. On the flip side, with the shares now trading for about $57/each, I’d argue the pendulum has swung a bit too far to the other way. It’s gone from expensive to cheap in a hurry. And that’s the market for you. Things can change very quickly. But here’s the thing: Most basic valuation metrics are below their respective recent historical averages. For example, the P/E ratio of 13.5 is slightly below its own five-year average of 14.1.
As you can see, this is a stock that always commands a pretty low earnings multiple. And I think that’s fair. We’re talking about a cyclical manufacturer here. That said, we’re below even those typically undemanding levels right now. Magna could be heavily affected by a recession, no doubt. However, the market is a forward-looking mechanism. A lot of that recessionary risk has seemingly already been priced in ahead of time after the near-40% drop in the stock’s price. Magna is at least worth a look right now, in my opinion.
Last but not least, let’s have a quick talk about Union Pacific (UNP).
Union Pacific is a North American railroad company with a market cap of $132 billion.
Back when I would play the Monopoly board game as a kid, I loved owning the railroads. And I feel the same as an adult. These are terrific businesses with barriers to entry that are so high, they’re practically insurmountable. Union Pacific has been putting up great numbers for a long time. But they could be putting up even better numbers in the future. See, there’s a big tailwind that could end up blowing their way.
I say that because of the potential onshoring of industry across the board in the US. Due to a combination of factors, the tide seems to be turning against globalization to a degree. Bringing more manufacturing back to the States would likely benefit Union Pacific, as there would be even more goods to move. This could also prove to be a nice tailwind for the dividend.
The railroad has increased its dividend for 16 consecutive years.
Union Pacific has been full steam ahead with its dividend. The 10-year DGR is 16.1%. Huge growth. And the great thing is, you don’t really have to sacrifice yield in order to access that dividend growth – the stock yields 2.5%, which is 50 basis points higher than its own five-year average. Also, the payout ratio of 49.4% represents almost a perfect balance between retaining earnings for growth and returning capital back to shareholders. Really good stuff.
This stock’s 25% drop could be just what you need to buy a great business at a reasonable valuation.
At the 52-week high of $278.94, the stock may have been running ahead of the business. However, with the stock’s pricing now at the $210 area, the stock and business have come into alignment. Almost every single basic valuation metric squares right up against its own recent historical average. A perfect example of this is the P/E ratio of 20 lining up almost perfectly with its own five-year average of 20.2.
The multiple of sales, at 6, is precisely in line with its own five-year average. This is a stock that is rarely on sale. And I wouldn’t say it’s on sale now, even after the huge drop. But the valuation has become reasonable. With the possibility of huge tailwinds to come, long-term dividend growth investors ought to consider jumping on this train before it leaves the station.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
The goal? To build a reliable, growing income stream by making regular investments in high-quality dividend-paying companies. Click here to access our Income Builder Portfolio and see what we’re buying this month.