Dividend stocks - you know, those investments that give you the opportunity to grow your money through a steady flow of passive income? Well, they're pretty popular with investors. Unfortunately, not all dividend stocks are knocking it out of the park during this year's growth-fueled rally, leaving some at a serious deficit compared to the performance of the S&P 500 Index ($SPX). That may leave some dividend investors wanting more when it comes to total returns.
But don't write off dividend stocks just yet! Surprisingly, some high-yielding underperformers have been making a comeback in recent months, simultaneous with a slowdown in the big tech rally. These names not only offer attractive dividend yields - but many of them now also come with discounted valuations. Plus, the best of the group have some future growth potential in their back pocket, too.
So, which companies stand out on this basis? Here's a look at two top dividend stocks to scoop up right now if you're looking for quality income picks.
A Closer Look at Devon Energy as Oil Prices Rise
With crude prices (CLV23) climbing to a new 2023 high to close out the week, let's start with a look at Devon Energy Corp (DVN).
They're one of the big players in the U.S. when it comes to oil and gas, with a footprint in five major resource pies: the Delaware Basin, the STACK, the Powder River Basin, the Barnett Shale, and the Eagle Ford Shale. What makes them stand out is their focus on quality, cost-efficiency, and long-lasting assets. Plus, they're all about keeping their finances in check and giving some love back to their shareholders.
Now, here's the scoop on their stock. DVN hasn't had the smoothest ride this year, down 15.8% year-to-date compared to gain of more than 15% for the S&P 500.
What's been dragging them down? Two main things: weakness in natural gas prices (NGV23) - Devon's production mix skews toward natural gas and natural gas liquids (NGLs) over oil - and a mixed second quarter in 2023, with earnings beating expectations but revenue falling short of the consensus estimate.
But hold on, there's a silver lining. In the past three months, Devon Energy has been flexing its muscles, and is now outperforming the S&P 500. Over the past month alone, DVN is up nearly 2%, while the S&P is nearly flat. Check out the chart below, and you'll notice a series of higher lows forming for DVN since the second quarter. That's a good sign for potential growth and stability.
Why the turnaround? Well, rebounding energy prices help, but Devon is also executing operationally – hitting record oil production of 323,000 barrels per day in Q2, up 8% from the previous quarter. Plus, Devon achieved a 99% completion rate on planned wells, and slashed drilling and completion costs by 10% year-over-year. They also managed to reduce their debt by $1.4 billion this year.
Cash is king, and they know it. Devon Energy dished out $1.1 billion to shareholders in Q2 through dividends and share buybacks - and their dividend game is strong. They're paying out a quarterly dividend of $0.49 per share for a current yield of 6.77%.
Plus, DVN is trading at a discount on the price-to-earnings front compared to its own historical levels, as well as industry averages. Right now, the trailing P/E ratio is 7.82, compared to Devon's five-year historical average of 11.52, and the industry average of 9.54.
With all this in mind, Devon Energy might just be the ticket for folks hunting high-yield dividend stocks that are priced at a discount. Analysts are in agreement, with 12 out of 20 giving it a strong buy and 8 recommending a hold. And if that mean price target of $60.40 pans out, it would indicate 21% upside from current levels.
VZ's Low Valuation and Potential Upside Make It a Strong Dividend Play
Next up we have Verizon Communications (VZ). You've probably heard of them - they're a massive telecom company, dishing out wireless, broadband, video, and media services to folks not just in the U.S., but in more than 150 countries. They operate mainly in the Consumer, Business, and Media segments. The Consumer part covers services like wireless and internet for everyday folks and small businesses, while the Business side handles the same for big enterprises, government entities, and wholesale clients.
Like other telecoms, Verizon is well-known for its yield - but here's the twist. The stock price has dipped 10% this year, significantly underperforming the broader equities market.
So, what's been dragging them down? Well, they've got some fierce competition in the telecom arena from the likes of AT&T (T) and T-Mobile (TMUS). Those two have been on a mission, expanding their networks, growing their customer bases, and rolling out new services. Plus, both AT&T and Verizon were hit hard earlier this year on reports of lead-covered cables throughout their networks that were in need of clean-up.
But don't count Verizon out. Recent trends show their stock price is bouncing back - VZ is up 1.6% to outperform the S&P over the last month.
And the telecom is paying out a pretty sweet dividend - $0.652 per share every quarter, to be exact. That adds up to a hefty annual dividend yield of 7.67%, and a dividend payout ratio of 52.66% - meaning they're keeping enough cash to reinvest in their business and keep those dividends flowing.
When it comes to valuation, Verizon is looking like a relative bargain. The current trailing price-to-earnings ratio is 6.88, while compares favorably to its five-year average of 12.59, and the industry average of 9.54. VZ's price-to-sales ratio is 1.04, compared to a five-year average of 1.58 and an industry average of 1.32. And the price-to-book ratio? It's at 1.48, while the five-year average is 3.62, and the industry's at 2.20.
Analysts seem to like what they see too, with 3 out of 18 recommending a strong buy, 3 suggesting a moderate buy, and 12 going for a hold. And if you're thinking about upside potential, here's some good news. The mean price target for Verizon is $42.03. That implies a potential 24% premium from the current price.
The Case for Adding DVN and VZ to Your Dividend Portfolio
While Devon Energy and Verizon Communications might not have had the best year overall, their recent stabilization on the charts is worth paying attention to. With solid dividend yields, buy ratings, attractive valuations, and room for growth, these are solid picks for any dividend investor.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
