While we're still not out of the woods with inflation or the Federal Reserve's historic rate-rising campaign, investors looking for passive income could load up quality dividend-paying stocks Cisco Systems, Inc. (CSCO) and Valero Energy Corporation (VLO) to help offset the adverse effects of the ongoing market turmoil.
Although the consumer inflation rate has fallen steadily from a June peak of 9.1%, the Fed has indicated to continue raising interest rates in small increments over the coming months to reach a terminal rate above 5% as the Personal Consumption Expenditure (PCE) index remains far from the Fed’s 2% goal.
After a slew of data indicating the economy is in a much more perilous position than previously anticipated, the stock market could be poised for another forceful plunge in March, according to Morgan Stanley’s (MS) investment chief, Michael Wilson.
Moreover, Principal Asset Management’s Seema Shah believes that the Fed’s relentless efforts to slow down the economy will inevitably hurt earnings and push equities downward. She further warns investors to brace themselves for increased volatility, as the Fed is not yet finished with its rate hikes.
Furthermore, according to a poll of economic expectations, a record number of Americans expect a stock-market slump in the near term, while a majority see inflation accelerating.
Amid the ongoing economic turmoil, investing in dividend stocks could add a defensive layer to your portfolio against market volatility and generate a steady income stream. Investors’ interest in dividend stocks is evident in the iShares International Select Dividend ETF (IDV) 9.4% returns over the past six months and 3.8% year-to-date.
Given this backdrop, investors could add dividend-paying stocks, CSCO and VLO, to their portfolios. Given their impressive high yields and solid growth prospects, these stocks could be solid buys for passive income-seeking investors.
Cisco Systems, Inc. (CSCO)
CSCO designs, manufactures, and sells Internet Protocol-based networking and other communications and information technology products. In addition, it provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products.
On February 27, the company partnered with Mercedes-Benz AG to provide an optimal mobile office experience in its new Mercedes-Benz E Class vehicles. The vehicles would be equipped with Webex Meetings and Calling and utilize Webex AI audio capabilities to enable greater flexibility for the hybrid workforce, along with modern luxury and intuitive features.
In the same month, CSCO introduced powerful new cloud management tools for industrial IoT applications, simplified dashboards to converge IT and OT operations, and flexible network intelligence to see and secure all industrial assets. With these new innovations, the company should be able to provide greater visibility and control over networks.
On January 31, CSCO exhibited its new range of collaboration devices for Microsoft Teams and unveiled the new Cisco Table Microphone Pro, a digital and multi-directional table microphone for hybrid workspaces and audio interoperability advancements.
Such innovations are expected to advance hybrid workers’ experience by delivering more inclusivity and choice for meetings while improving the manageability, configuration, and security required by IT.
On February 15, the company declared a quarterly dividend of $0.39 per common share, representing an increase of 3% from the previous quarter. This dividend is payable on April 5, 2023. It pays a $1.56 per share dividend annually, which translates to a 3.23% yield on the current price. Its four-year average dividend yield is 2.99%.
The company’s dividend payouts have grown at a 2.8% CAGR over the past three years and a 5.6% CAGR over the past five years. Moreover, CSCO has a record of 11 years of consecutive dividend growth.
CSCO’s trailing 12-month net income margin of 21.26% is 636.2% higher than the industry average of 2.89%. Likewise, the stock’s trailing-12-month EBIT margin and EBITDA margin of 26.58% and 29.74% compare to the industry averages of 6.32% and 11.28%, respectively.
For the fiscal second quarter that ended January 28, 2023, CSCO’s total revenue increased 6.9% year-over-year to $13.59 billion, and its gross margin grew 4.7% from the year-ago value to $8.43 billion. Its non-GAAP operating income came in at $4.41 billion, up 1.1% year-over-year.
Furthermore, the company’s non-GAAP net income increased 2.6% year-over-year to $3.64 billion, while its adjusted EPS came in at $0.88, an increase of 4.8% year-over-year.
The consensus EPS estimate of $0.97 for the third quarter (ending April 30, 2023) represents an 11.6% improvement year-over-year. The consensus revenue estimate of $14.40 billion for the current quarter indicates a 12.2% increase from the prior-year period. The company has an excellent earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
It has gained 6.9% over the past nine months to close the last trading session at $48.34.
CSCO’s solid prospects are reflected in its POWR Ratings. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It also has an A grade for Quality and a B for Stability and Sentiment. Within the B-rated Technology - Communication/Networking industry, it is ranked #2 out of 50 stocks. Click here to see the additional ratings of CSCO (Growth, Value, and Momentum).
Valero Energy Corporation (VLO)
VLO is a manufacturer and marketer of petroleum-based and low-carbon liquid transportation fuels and petrochemical products. The company operates in three segments: Refining; Renewable Diesel; and Ethanol. Its offerings include conventional, premium, and reformulated gasoline, California Air Resources Board (CARB) gasoline and diesel, and other refined petroleum products.
On January 31, the company announced the increase of its quarterly dividend from $0.98 per share to $1.02 per share. This dividend is payable to its shareholders on March 16, 2023. VLO’s four-year average dividend yield is 5.01%, and its forward annual dividend of $4.08 translates to a 2.93% yield on prevailing prices. Its dividend has grown at a 2.5% CAGR over the past three years and a 6.4% CAGR over the past five years.
The stock’s trailing 12-month ROCE of 54.70% is 143.6% higher than the industry average of 22.46%. Likewise, the stock’s trailing-12-month ROTC and ROTA of 27.04% and 18.90% compare to the industry averages of 9.18% and 7.81%, respectively.
VLO’s revenues increased 16.3% year-over-year to $41.75 billion in the fiscal 2022 fourth quarter (ended December 31, 2022). Its operating income improved 169.4% year-over-year to $4.29 billion. Adjusted net income attributable to VLO came in at $3.23 billion, up 226.6% year-over-year. The company’s adjusted earnings per share came in at $8.45, registering an increase of 250.6% from the prior-year period.
Street expects VLO’s EPS for the first quarter (ending March 31, 2023) to increase 189.6% year-over-year to $6.69. Its revenue is expected to increase 2.6% year-over-year to $39.56 billion. Moreover, the company surpassed the EPS estimates in each of the trailing four quarters, which is promising.
Over the past year, the stock has gained 72.8% to close the last trading session at $139.29.
VLO’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Growth, Value, and Quality. In the B-rated Energy - Oil & Gas industry, it is ranked #2 out of 91 stocks. Click here to see the other ratings of VLO for Stability and Sentiment.
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CSCO shares were trading at $48.20 per share on Thursday afternoon, down $0.14 (-0.29%). Year-to-date, CSCO has gained 1.98%, versus a 3.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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