Bear markets are a difficult time for investors. However, these challenges can create unique opportunities.
One of the benefits of a bear market is that dividend yields move in an inverse relationship with stock prices. For this reason, when stock prices have fallen, income-oriented investors can recoup particularly lucrative income streams. And according to three of our contributorsthe current downturn on Wall Street has Honeywell (HON 0.75%), Phillips 66 (PSX 2.90%)and Energy transfer (AND 0.40%) into even more attractive dividend-paying equity opportunities.
Take a long view with this industrial powerhouse
Reuben Gregg Brewer (Honeywell): One of the best ways for a small investor to pick stocks is to look for historically well-managed companies that have fallen on hard times. Industrial giant Honeywell, down about 20% from its mid-2021 peak, seems to fit that description. Much of its decline came during the 2022 bear market. But investors who buy its shares now can collect a dividend that, at the current share price, yields 2.1%. And its payouts are backed by more than a decade of annual increases, making Honeywell a Dividend Achiever.
The $120 billion market cap industrialist is one of the world’s largest players in its field. Its four divisions are Aerospace, Building Technologies, Performance Materials & Technologies, and Safety & Productivity Solutions. Despite current headwinds, including inflation and supply chain headaches, each of these business units recorded double-digit percentage operating margins in the first quarter. Overall, organic sales increased by 1%, whereas they would have been 3% without the drop in sales of masks used to protect against the coronavirus. The stock is down, but it’s certainly not a company struggling to survive.
Equally important is that Honeywell has a backlog of $28.5 billion, up 9% year over year. It’s the work that remains to be done that can help the company weather an economic downturn, should one materialize. So even in the worst-case economic scenario, Honeywell looks well positioned. If you’re a long-term investor, now would be a good time to start digging into this industry-leading industry name.
Refining giant’s dividend yield is up
Matt DiLallo (Philip 66): Shares of refining the giant Phillips 66 has fallen almost 25% from its peak in early June. This liquidation pushed the company’s dividend yield to over 4.5%. That’s a pretty attractive payout for a company that’s been a great passive income producer over the years.
Phillips 66 increased its dividend by 5% last month, marking its 11th payout increase since its inception a decade ago. The refiner increased its payment at a compound annual rate of 18% during this period.
This high-yield payout is on solid footing these days. Refining margins are skyrocketing on strong demand for refined petroleum products like gasoline, jet fuel and diesel. That gives Phillips 66 excess cash to repay debt — it repaid $1.45 billion in April and plans to repay more later this year — resume its share buyback program and invest in the future. The company recently revealed plans to convert its San Francisco refinery into a renewable fuels facility and signed a partnership to deploy electric vehicle charging stations at its gas stations and other strategic locations.
These investments in low-carbon energy sources will help fuel the company’s growth for years to come. This should allow Phillips 66 to continue to generate plenty of free cash flow to support its dividend payouts. With the recent stock market sell-off that sent its shares tumbling, now seems a good time to acquire this passive income producer at a more attractive price and dividend yield.
Attractive high yield that could get even bigger
Neha Chamaria (Energy Transfer): Energy Transfer shares have lost nearly 14% of their value in just one month. At the current share price, however, its dividend is yielding 7.7%, providing income investors with an attractive opportunity.
Three things are worth noting here. First, the payment of the intermediary energy company is supported by a growing cash flow. Second, it has many projects in development that should support regular and continued dividend payouts. Third, and most importantly, management said it intends to increase the company’s quarterly payouts to the highest level ever paid out – $0.305 per share – which it has paid through mid-2020. , at which time it cut the dividend to focus on deleveraging. Energy Transfer recently increased its dividend by 30%, paying investors $0.20 per share on May 19.
Even if Energy Transfer stock is up 25% from here, its quarterly dividend target of $0.305 per share, or annualized dividend of $1.22 per share, would imply a yield of nearly 9.8%. The point I’m trying to get across is that Energy Transfer’s performance isn’t high just because its stock price has fallen. These types of high yields are often not sustainable. High yield backed by payout growth is what makes a dividend-paying stock worthy of inclusion in your portfolio.
In addition, it is worth recognizing the reasons why Energy Transfer is confident that it will be able to increase its payments. Its intermediate energy storage and transmission activities are largely outsourced. Nearly 90% of its adjusted earnings before interest, tax, depreciation and amortization (EBITDA) this year are expected to be fee-based. The company also plans to spend up to $2.1 billion on growth projects this year and is working on bigger things like building a liquefied natural gas import terminal in Lake Charles, Louisiana. The company has been trying to bring this terminal online for several years, but conditions in its end markets have not been favorable so far.
The outlook looks bright, and with the company eyeing larger dividends in the near future, Energy Transfer shouldn’t disappoint investors looking for passive income.