The most exhilarating investment decisions often involve putting your hard-earned money to work in exciting companies that successfully disrupt industries and increase in value severalfold. But not every investment has to be a home run.
In fact, role players can act as foundational holdings that form the bedrock of a rock-solid portfolio. American Electric Power (AEP 0.49%), Carrier Global (CARR -1.06%), and WM (WM -0.49%) don't have the glitz and glam of a high-flying growth stock. But all three companies have what it takes to steadily grow earnings and return value to shareholders over the long term.
Here's why these Motley Fool contributors think all three dividend stocks are outperforming the S&P 500 and Nasdaq Composite in 2024 and could still be worth buying now.
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Income investors will want to plug into this utility
Scott Levine (American Electric Power): Powering past the impressive rises of both the S&P 500 and the Nasdaq Composite, shares of electric utility stock American Electric Power have soared more than 27% since the start of the year.
The stock has performed well in 2024, and investors' interest in the 3.4% forward-yielding dividend stock could continue to remain strong, sending shares even higher in the coming months.
With American Electric Power's impressive performance in 2024, it's no surprise that investors have felt motivated to click the buy button. For example, the utility achieved strong growth in its funds from operations (FFO) for the 12 months ending June 30. Its FFO of $6.39 billion is an 11.5% increase over the $5.74 billion for the 12 months ending Dec. 31, 2023.
Management's auspicious view of the future also inspired investors. For 2024, American Electric Power projects operating earnings per share of $5.53 to $5.73. Should it achieve the midpoint of this guidance, it will represent a 7.2% increase over 2023. Investors will want to be especially attentive to this metric because management targets a payout ratio of 60% to 70% of operating earnings for 2024 through 2028.
While shares of the utility have risen in 2024, it seems that the stock is still undervalued. It currently trades at 8.5 times operating cash flow, a discount to the average multiple of 9.5.
The market continues to reward this portfolio restructuring
Lee Samaha (Carrier Global): In 2020, this company was spun off the former United Technologies (with a long history of increasing dividends itself, which Carrier has continued). As part of a vast industrial conglomerate encompassing elevators, defense, and aerospace products, Carrier couldn't be as agile in the rapidly changing heating, ventilation, and air-conditioning (HVAC) industry as it might want to be.
The industry is at the forefront of the move toward energy-efficient and sustainable buildings and the use of digital technology to enhance that. With Carrier's independence established in 2020, CEO Dave Gitlin could focus on this growth opportunity while divesting the noncore businesses and restructuring the company for growth.
It is finally primed for its future as an HVAC company. Its Chubb fire & security business was sold for an enterprise value of $3.1 billion in 2022. Honeywell bought Carrier's global access solutions for an enterprise value of $4.95 billion in June 2024, and Carrier sold its industrial fire detection and suppression business for $1.425 billion in July. Management also recently announced an agreement to sell its commercial and residential fire detection business for $3 billion.
Among these substantive divestments, Carrier acquired the European climate technologies company Viessmann Climate Solutions for $12 billion in early 2024. The deal strengthens Carrier's global position in heat pumps, a more efficient technology than boilers.
The European Union aims for the installation of another 30 million heat pumps from 2020 to 2030, creating an ample growth opportunity for Viessmann (Carrier). And with its existing HVAC solutions improving building efficiency, Carrier has many years of growth ahead.
The pullback in WM stock is a buying opportunity
Daniel Foelber (WM): WM, formerly known as Waste Management, is down about 8% from its all-time high, achieved in July. But it is still beating the S&P 500 and Nasdaq Composite this year.
In its second-quarter 2024 results, WM achieved an adjusted operating margin for earnings before interest, taxes, depreciation, and amortization (EBITDA) of 30% for the first time in its history. Cost optimization and price increases are helping WM rake in free cash flow (FCF) and expand margins.
The strong cash FCF generation is allowing WM to aggressively invest in sustainability projects like recycling and renewable natural gas (RNG). As organic material decomposes in a landfill, it produces methane that can be captured as landfill gas, treated, and turned into pipeline-quality natural gas. It is a sustainable alternative to extracting natural gas from fossil fuels, but the industry is still heavily dependent on subsidies.
A network of landfills makes it one of the best-positioned companies to unlock long-term growth from RNG. But even without it, WM is still a highly reliable business resistant to recessions.
WM has commercial, industrial, and residential customers. Economic growth can result in higher demand for waste removal. But even during a recession, the company's long-term contracts help protect it from slowing demand. The consistent business model makes WM an excellent safe stock for risk-averse investors.
WM has just a 1.4% dividend yield, which isn't very impressive at first glance. But the low yield is more of a result of WM's strong stock performance rather than a lack of dividend raises. Over the last decade, WM has doubled its dividend and reduced its share count by over 12%, thanks to stock repurchases.
With a 33.1 price-to-earnings ratio, WM isn't an inexpensive stock by any means. Valuation concerns, weak volume growth, and too much reliance on price increases might be why the stock has pulled back from its highs in recent months.
Still, WM has plenty of qualities that make it a reliable dividend stock no matter what the economy is doing. It's an excellent choice for investors to consider now.
