If you're looking at dividend stocks as a source of income, obviously quality matters. But timing can play a role in how much income these investments generate for you, too. The lower these stocks are priced, the more shares you can buy, and the higher your effective yield is.
In other words, you get more bang for your buck when you buy dividend stocks while they are trading at a discount.
With that as the backdrop, here's a closer look at three of the S&P 500's top dividend payers that are currently on sale. Any or all of them would be solid additions to most income investors' portfolios.
1. Merck
Thirty years ago, major pharmaceutical names like Merck (MRK -1.32%) were titans. New science had laid the groundwork for a golden era, giving all the big names in the business at least one blockbuster drug, plus at least one or two prospective blockbusters in each company's pipeline. For Merck, these leading products were Singulair, Januvia, and Vioxx.
The industry has changed since then, however. It's more crowded, and as such, it's more competitive. That's why these companies don't grow their top lines as rapidly as they used to. Merck is no exception to this dynamic either. That's why its stock has generally underperformed the S&P 500 for the past 20 years.
Just don't lose perspective.
While the business's glory days may be in the rearview mirror, what this company lacks in growth firepower it more than makes up for in reliable income that in turn supports a dividend that's grown every year for the past 14 years. Merck is simply leveraging its sheer size to either develop new drugs or acquire them. For instance, its current top-selling cancer drug, Keytruda, was actually the prize from 2009's acquisition of Schering-Plough. And, now that the end of Keytruda's smashing commercial success is at least in sight, it's paying China's biotech LaNova Medicines for the right to its developmental cancer therapy currently in phase 1 trials.
This is the new norm within the world of medicine, and Merck navigates it nicely even if not explosively. Better still, with the stock now down 25% from June's peak, newcomers will be stepping in at a forward-looking dividend yield of nearly 3.3%.
2. Nike
There's no denying Nike's (NKE -1.26%) fall from grace.
The athletic apparel brand's stock was flying high into and then even through the heart of the COVID-19 pandemic, driven higher by consumers' affinity for its goods (and its sneakers in particular). Then it all came unraveled. Thanks to a combination of supply and distribution snafus, evolving consumer preferences, economic lethargy, and a lack of perceived innovation, in 2022 Nike's business hit a wall. Ditto for the stock, which is now down roughly 60% from its late-2021 peak and still knocking on the door of lower lows.
The sellers, however, arguably overshot their target.
That's not to suggest Nike is entirely out of the woods just yet. Revenue for the quarter ending in February is expected to be down 11% year over year, contributing to a full-year sales dip of about 10%. Footwear continues to be the biggest drag, here and abroad.
Things are changing for the better though. In October former Nike executive Elliott Hill rejoined the company as its CEO, starting a sweeping reset of most of the organization's operations. That same month the company moved Tom Peddie into the role of vice president and general manager of the all-important North American market. His top priority is still the same though. That's rebuilding the wholesale relationships Nike abandoned just a few years earlier when the company expanded its own direct-to-consumer ambitions ... the task he was first charged with back in July when he was brought back as VP of marketplace partners.
There's still work to be done. Stocks tend to move predictively rather than reactively, though. Assuming Hill and Peddie and all the changes they're working on are going to pan out, Nike stock could -- and should -- take a turn for the better sooner rather than later. In the meantime the forward-looking dividend stands at a respectable 2.2%.
That's a dividend, by the way, that's now been raised 23 years in a row.
3. PepsiCo
Last but not least, add PepsiCo (PEP 0.31%) to your list of beaten-down dividend stocks to buy. Its stock is now priced 26% below its mid-2023 high, pumping up its projected dividend yield to an impressive 3.8%.
The reason for this stock's prolonged pullback isn't tough to figure out. Inflation finally caught up with it. Revenue is essentially flat year to date; total volume for the year so far is down as well. Price increases have prompted consumers to consider more affordable snacking and beverage options. It's a dynamic most investors just aren't accustomed to seeing trouble this stalwart company, hence the stock's steep setback.
Just don't become so fixated on the past that you don't see the plausible future or even the present. Things are looking better here. For instance, the Bureau of Economic Analysis reports that personal consumer expenditure growth within the U.S. between August and November has reliably remained between 2.1% and 2.4%, in line with income growth. And, while inflation rates are no longer cooling, they are stabilizing in that same range. Moreover, households are still able to save at least a small portion of their monthly income.
So what? It just means that money isn't quite as tight as it felt like it was a year ago, nor will it be quite as tight as it seemed like it was going to be a year from now. PepsiCo will not only enjoy a little more pricing power in the foreseeable future, but its own cost increases are abating, too.
It remains to be seen when other investors will begin connecting these dots. But it feels like it's going to happen sooner rather than later.
The kicker: With 52 consecutive years of annual dividend growth under its belt, you'd be hard-pressed to find a stock with a stronger dividend pedigree.
