With 2024 nearing a close, now is a great time to reflect on your financial journey and look for stocks than can help you achieve your goals in 2025 and beyond. If your objectives include generating passive income, then you've come to the right place.
Freeport-McMoRan (FCX -0.84%), York Water (YORW -1.14%), and PepsiCo (PEP 0.29%) have all tumbled this year while the broader indexes are hovering around all-time highs. Here's what makes all three dividend stocks compelling buys before the new year.
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Freeport-McMoRan's best days lie ahead
Lee Samaha (Freeport-McMoRan): With a dividend yield slightly above the S&P 500 average of 1.3% and a share price that's down 32% from its all-time high, this copper miner makes for a good dividend stock candidate. Moreover, its growth prospects are likely to make it easier for management to raise its dividend in the future.
The stock is often seen as a play on the price of copper. That's an understandable view as it is the key driver of its earnings. As such, it's not a stock worth buying unless you are positive on the price of copper. Still, that's not all there is to the investment case; there are two other big reasons to buy the stock.
First, even if you are neutral on the price of copper and are willing to assume it stays where it is now (about $4.25 per pound), there's a strong case for buying the stock. For example, management estimates its earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2025/2026 will be $11 billion at $4 per pound and $15 billion at $5 per pound.
Interpolating these figures by plugging in the current price of copper leads to an estimate of EBITDA of $12 billion. The current enterprise value (market cap plus net debt) of $65.9 billion implies an EV/EBITDA ratio of just 5.5 in 2025/2026, an excellent value.
Second, as previously discussed, Freeport-McMoRan has an exciting leaching initiative that could significantly increase copper production at a relatively low cost. As such, the stock is an excellent value for copper bulls and investors willing to take a neutral position on the price of copper.
Drink up dividends from York Water before you ring in the new year
Scott Levine (York Water): York Water is a water utility stock that warrants strong consideration for those looking to boost their passive income streams in 2025.
While shares have fallen 9% year to date, investors shouldn't be reluctant to drink up the stock as it seems more a result of the market unfairly punishing the stock for missing third-quarter earnings estimates. Providing a 2.5% forward dividend yield, York Water has maintained a steadfast commitment to rewarding shareholders for decades, and the stock's allure is further enhanced right now with its attractive price tag.
Smart investors know that a company's prior performance doesn't guarantee future results. But that doesn't mean that a company's history isn't worth examination -- especially when that history spans more than two centuries. Since 1816, York Water has been providing water service, and over that time, it has consistently rewarded investors with dividends, making 616 dividend payments and hiking the dividend for the past 28 consecutive years.
How has the company achieved such an impressive feat? Operating as a regulated utility, York Water is guaranteed certain rates of return.
YORW Revenue (Annual) data by YCharts.
This, consequently, provides management with a sense of future cash flows and insight into planning for capital expenditures, including infrastructure upgrades, acquisitions, and dividend payments. In 2024, for example, York Water allocated $33 million to upgrade the Lake Williams dam as well as to construct wastewater treatment plant and other projects.
Currently, shares of York Water are changing hands at 14.9 times operating cash flow, representing a discount to their five-year average cash flow multiple of 20.3. York Water looks especially attractive for those looking to quench their thirst for a reliable dividend stock right now.
A high-yield stock at an excellent value
Daniel Foelber (PepsiCo): It's been a solid year for the consumer staples sector, which is up over 13% year to date. Sure, it's not as good as the S&P 500, but the sector tends to underperform growth-driven rallies in major indexes because many of the top holdings are stodgy, low- to moderate-growth companies.
The sector probably won't appeal to risk-tolerant investors looking for tons of upside potential. However, companies like Pepsi are tailor-made for folks looking to boost their passive income or supplement income in retirement.
On Nov. 19, the food and beverage giant raised its dividend for the 52nd consecutive year -- boosting the payout to $5.42 annually. As of the time of this writing, that would translate to a yield of 3.4% -- which is the highest level in 10 years if you exclude the brief spike in Pepsi's yield during the COVID-19-induced stock market sell-off in March 2020.
PEP Dividend Yield data by YCharts
As you can see in the chart, Pepsi is trading at a discounted price-to-earnings ratio of 23.3 compared to its 10-year median P/E of 26.1. So, Pepsi checks all the boxes regarding dividend track record, yield, and valuation. But there are valid reasons why Pepsi is a relatively inexpensive stock.
Pepsi's growth has ground to a halt. Through the first three quarters of 2024, Pepsi's convenient foods volume declined by 2% and its beverages volume slipped 1%. The company is still guiding for a 7% increase in 2024 core earnings per share compared to 2023, but that's largely due to price increases.
Management has been upfront about pricing sensitivity on recent earnings calls and is driving value for consumers through new marketing ideas and higher product quantities. While these ideas could boost volumes, they will likely lead to lower margins in the near term. 2025 will be a year for Pepsi to regain its footing so that its earnings growth isn't so dependent on price increases.
Despite its struggles, Pepsi is still an incredibly profitable company with a top-tier supply chain and distribution network that continues to grow its portfolio and acquire new brands. On Oct. 1, Pepsi bought Siete Foods for $1.2 billion. The company makes tortillas, salsas, seasonings, sauces, cookies, and snacks. On Nov. 22, Pepsi acquired the remaining 50% stake in hummus and spread giant Sabra Dipping Company LLC and PepsiCo-Strauss Fresh Dips & Spreads International GmbH. The move will boost Pepsi's coverage in on-the-go snacks.
Pepsi has a diverse assortment of brands spanning virtually every non-alcoholic beverage category and snack products under Pepsi-owned Frito-Lay and Quaker Oats. Given its highly diversified product lineup, Pepsi is a great buy for folks looking for a reliable dividend-paying company at a reasonable valuation.
