The Dow Jones Industrial Average has outperformed the S&P 500 in recent months.
At the beginning of 2024, broad indexes were rising, driven primarily by mega-growth stocks. But in recent months, market leadership has shifted, with blue-chip and value stocks with weak dividends posting big gains.
For example, Nvidia is down 3.1% over the past three months, while the S&P 500 is up 3.2% and the Dow Jones Industrial Average is up 7.1%. Meanwhile, Dow constituents Coca-Cola (KO -0.50%), Home Depot (HD -0.78%) and McDonald’s (MCD 0.10%) rose further.
Here’s why these three blue-chip dividend stocks could be solid buys in October for people looking to earn passive income.
Image source: Getty Images.
Coca-Cola is returning to growth
Coca-Cola is a great example of how even a low-growth, low-growth company can be a good investment if investors look beyond their exceptions.
Coca-Cola is an established and mature company with a global beverage portfolio. Investors looking for stable returns and growing dividends may be attracted to buying or holding Cora stocks because they can deliver results no matter what the economic or other stock market conditions are. expensive. So Coke doesn’t need to deliver impressive double-digit profit growth to impress investors. All it has to do is maintain a strong balance sheet while growing profits enough to justify reasonable dividend increases.
Coca-Cola’s recent dividend increase was a healthy 5.4%, and the company is expected to report record earnings this fiscal year, so it’s understandable why the stock has tumbled in recent months.
KO data by YCharts. Coca-Cola, Home Depot and McDonald’s have dragged down the broader index over the past three months.
After sales plummeted at the height of the pandemic, Coke successfully weathered inflationary pressures. The company’s pricing power is maximized as it continues to take full advantage of its growing portfolio of soft drinks, coffee, tea, juices, energy drinks, water and sparkling water.
Coca-Cola’s soaring stock price has pushed its yield down to 2.7%, pushing its price-to-earnings ratio above historical levels. However, Coke is in a good position to maintain high profit margins and return profits to shareholders.
Coca-Cola may pull out due to valuation concerns. However, the underlying business is in good shape, suggesting that Coke remains a good buy for long-term investors looking for a reliable dividend stock.
Home Depot’s worst downturn may be nearing an end
Home Depot’s performance has been relatively weak in recent years. The company lowered its full-year forecast in its latest report, predicting that sales and profits for fiscal 2024 would be lower than in fiscal 2023. Despite the bleak outlook, Home Depot has been one of the hottest stocks on the Dow in recent months, having just hit a new all-time high on Oct. 2.
The two biggest factors that may have driven up Home Depot’s stock price were that Home Depot was a cheap dividend stock in an expensive market, and that lower interest rates were benefiting the housing market and, by extension, the home improvement market. It is possible that this could lead to As you can see in the graph below, Home Depot’s P/E ratio was around the 5-year, 7-year, and 10-year medians, but has since skyrocketed in tandem with the stock’s rise.
HD PE Ratio data by YCharts.
Lower mortgage rates will encourage increased consumer spending, which could be beneficial to Home Depot’s future results. But it’s worth understanding that the rise in Home Depot stock is based less on the company’s past performance and more on what it can do in more favorable economic conditions.
Given its high valuation, Home Depot is no longer a very attractive company. However, it may still be a good dividend stock to buy and hold for the long term.
The company has a track record of growing earnings and dividends at an incredible pace and investing through cycles. Earlier this year, Home Depot made an $18 billion acquisition, the largest in its history. This move was taken with the understanding that it may take some time for the move to bear fruit. There are not many companies that can achieve such great results during an industry downturn.
With a dividend yield of 2.2%, Home Depot could still be a good buy for investors who like the company’s strategic decisions and think it could be a springboard for a housing market recovery. be.
Healthier consumers are great news for McDonald’s
In July, McDonald’s was knocking on the door at a 52-week low. Investors grew concerned that the company was losing pricing power and customers were gravitating toward more affordable options. But McDonald’s stock has risen nearly 20% in the past three months, hitting a new 52-week high.
This move may signal that McDonald’s has turned a corner. However, management is not confident about the company’s short-term prospects. People are still choosing to buy, and lower interest rates are unlikely to change that behavior overnight.
It’s also worth understanding that McDonald’s is not a company that should be valued based on traditional metrics such as P/E, as only 5% of its restaurants are owned and operated by the company. It’s wise to take a long-term view of McDonald’s revenue and operating margins, as the franchise business model can result in volatile revenues.
MCD Revenue (TTM) data by YCharts.
As you can see from the graph, McDonald’s sales have rebounded from their pandemic lows and profit margins are expanding. This means there’s plenty of room to lower prices and extend promotions like $5 meal deals if needed.
In the case of McDonald’s, investors seem to be taking a very long-term view of the stock, focusing on where the company will be at least a year from now rather than where it is today.
Another factor driving the rise in stock prices is China. China recently announced a stimulus package aimed at boosting economic growth and boosting consumer spending. Given its presence in the country, the potential strength of the Chinese economy is good news for McDonald’s.
While McDonald’s isn’t quite as big of a buy as it was a few months ago, it still stands out as a dividend stock worth buying right now. McDonald’s recently increased its dividend by 6% to $1.77 per quarter, or $7.08 annually. This corresponds to a future yield of 2.3%. Considering the S&P 500 yields only 1.3%, this is not a bad source of passive income.
Three rational buying strategies for long-term investors
Coca-Cola, Home Depot, and McDonald’s are three incredible companies whose stock prices rose significantly in a relatively short period of time despite being bargains. Every time a stock price moves significantly based on expectations, companies are under pressure to deliver or face a decline in stock price.
All three companies aren’t as expensive as they were earlier this year, but they’re not necessarily expensive for investors looking for quality dividend stocks. In fact, these are the exact types of companies that investors can hope will be able to weather a recession.
If you’re looking to invest in quality, it might be wise to evaluate all three stocks carefully, keeping in mind that the current bull market could quickly cool down.
