With the broader indexes hovering around all-time highs, some folks may be looking to put new capital to work in out-of-favor companies that feature stable and growing dividends. If you’re in that camp, a good starting point is to peruse the list of Dividend Kings — which are companies that have paid and raised their dividends for at least 50 consecutive years.
Coca-Cola(NYSE: KO), Target(NYSE: TGT), and Stanley Black & Decker(NYSE: SWK) have all sold off in recent months. Here’s why these three stocks stand out as compelling buys in December.
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Coke is one of those stocks that rarely goes on sale or falls by a considerable amount in a short period of time. It has historically commanded a premium valuation relative to the S&P 500 due to its stability and consistent dividend growth. It’s particularly rare to see Coke fall by a double-digit percentage while the index is up double-digits.
Coke hit an all-time high in September despite slowing growth. So maybe the sell-off is partially due to the valuation simply returning closer to historical levels. But there are other factors at play as well.
As you can see in the chart, the consumer staples sector hasn’t rallied with the S&P 500. In fact, it has sold off lately as investors seem to be gravitating more toward growth stocks and away from value and income.
To be fair, Coke has some of its worst near-term growth prospects in years. Its unit case volumes are falling slightly, indicating weakening demand. It is a global business that generates the majority of its sales and operating income outside the U.S. Coke’s diversification is typically a good thing. Still, it can be a headwind when the U.S. dollar is strong because Coke will have lower earnings once it converts foreign currencies to dollars.
So investors only looking at where Coke may be a few months from now may find few reasons to buy the stock. But a better way to build wealth over time is to identify excellent companies, buy them at reasonable valuations, and hold them through periods of volatility or when they are out of favor.
Coke’s valuation has come down to a level below its historical average, and it now trades at a discount to the S&P 500. It also sports a dividend yield of 3.1%, presenting a solid passive income opportunity.
Coke is in for a challenging year and will have to lean on the strength of its brands, supply chain, and distribution network. But zoom out over the course of at least a three- to five-year time horizon, and Coke stands out as a phenomenal dividend stock to buy now.
Target has recovered slightly from its 22% single-day plunge, which occurred after it reported fiscal 2024 third-quarter earnings and cut its fourth-quarter guidance. But the stock is still down slightly over the last year whereas its peer Walmart is up a mind-numbing 88.3%.
Target has had a choppy few years. Pre-pandemic, Target was building out its e-commerce offering and loyalty program, proving it could hold its own even in an Amazon-dominated retail environment. Target’s pre-pandemic expansion was instrumental in setting the stage for a booming business during the pandemic, and ultimately, helped the stock reach an all-time high in November 2021 thanks to strengths in e-commerce and curbside pickup, as well as consumers gravitating toward goods over services.
But Target has struggled during this inflationary period. Its product mix is more discretionary than Walmart’s, and it simply hasn’t been able to demonstrate as much value to consumers. Another major problem with Target is its inability to give investors clear guidance. The company’s guidance has been all over the place, resulting in some major beats and misses in recent years, leading to surges and sell-offs in its stock price. Unpredictability isn’t exactly what income investors expect when buying a Dividend King.
Target has a lot of work to do to regain investor confidence. However, I think its buy case is fairly straightforward. Despite all its struggles, Target has decent margins and is a highly profitable company. Its P/E ratio and forward P/E are both below its median P/E ratio over the last three to 10 years — so the stock is relatively cheap. Target has also made considerable dividend raises in recent years, which, when paired with the poor-performing stock price, have boosted the yield to 3.4%.
Add it all up, and Target stands out as an excellent high-yield value stock to buy in December.
While Coke and Target are seeing their demand slow but are still highly profitable, tool maker Stanley Black & Decker is in a completely different category: deep value turnaround company.
For the last few years, the company has been completely overhauling its cost structure to pay down debt, improve the balance sheet, and chart a path toward higher margins. By 2025, the company’s goals are to get to $2 billion in cost savings by simplifying its operating margin and reducing corporate complexity; $300 million to $500 million in strategic investments in innovation, market leadership, and a responsive supply chain; and 35% adjusted gross margins by fostering innovation and better customer fill rates. If Stanley Black & Decker achieves these goals, it could look like a dirt cheap stock. But unfortunately, it has already run into challenges, including an earnings miss and a possible delay in its recovery path.
On its third-quarter earnings call from Oct. 29, the company discussed the potential boon it could get from lower interest rates. But with economic growth stronger than expected, we could see interest rates stay higher for longer, which could further delay Stanley Black & Decker’s turnaround.
With a 3.9% yield, Stanley Black & Decker stands out as an intriguing Dividend King to buy for investors who are confident about a recovery in consumer spending and have a long investment time horizon in case further delays hold the company back in the near term.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool has a disclosure policy.
