With China and the United States finally talking to one another regarding tariffs, there's a glimmer of hope on the macroeconomic horizon. Investors might want to continue thinking and acting defensively though, given that we still don't exactly what the future holds. That would mean owning fewer risky growth stocks than you normally might, and holding a few more dividend payers that can generate reliable cash flow regardless of the economic environment.
With that as the backdrop, here's a rundown of three solid S&P 500 dividend stocks that have been driven down far more than they deserve, driving their dividend yields up to levels too good to pass up.
Target
There's no denying Walmart stock has outperformed Target(NYSE: TGT) stock since the dust of the pandemic finally started to settle in 2021. Indeed, although Walmart is back within sight of its record high reached in February, Target shares are near a five-year low. The stocks' disparate performances reflect the two retailers' differing results. Target's higher-end "cheap chic" schtick hasn't resonated as much with consumers who are simply looking for affordable consumer staples in this high-inflation environment.
Nothing lasts forever though. As time marches without any hint of an actual recession taking hold, the closer we inch toward economic growth that creates demand for Target's more-premium discretionary offerings.
We're already seeing glimpses of this recovery, in fact, even if it's difficult to believe the world's ready to rebound in the midst of tariff-fueled turbulence. For instance, Target topped its revenue and earnings estimates for the quarter ending in early February, while same-store sales improved by 1.5%. That's not much, but it's a respectable start to a turnaround following several years' worth of subpar sales. In this vein, although analysts aren't looking for much heroic growth this year, the top line should swell by nearly 3% next year, with earnings following suit. That would actually be a big victory for this recently beleaguered retailer.
This doesn't mean it will be easy -- or consistent -- to be clear. While there's reason for hope that consumer spending can grow again (perhaps boosted by lower interest rates), the U.S. economy is still on shaky ground.
With Target shares now down more than 60% from their 2021 high and trading at a forward-looking price/earnings ratio of less than 12 though, most of the risk has been wrung out. Newcomers will be stepping in while its forward-looking yield stands at just over 4.6%.
Pfizer
It's been a tough couple of years for drugmaker Pfizer(NYSE: PFE). The stock's now down 64% from the pandemic-driven surge that peaked in late 2021, when sales of its blockbuster COVID-19 vaccine (Comirnaty) and antiviral treatment (Paxlovid) began tapering off. The company has been unable to offset this 40% decline in total sales with anything else in its portfolio.
As the old adage goes though, nothing lasts forever. This multiyear lull may finally be winding down and giving way to new growth.
The key to that potential growth is, of course, the candidates in its developmental pipeline. Although the pharmaceutical giant disappointed investors last month by discontinuing the development of a weight-loss drug that it had hoped would compete with the likes of Wegovy and Ozempic, it still has 108 drug candidates undergoing trials. Of those, 30 are in late-stage trials and could soon be ready for the FDA's final approval process. Oncology drugs feature prominently in this lineup thanks to the company's 2023 acquisition of Seagen. While that's always a competitive market, effective cancer drugs are also reliably marketable.
Pfizer isn't stopping there, however. Although the company admittedly got a little sloppy with its finances during and because of the pandemic, it's tightening up now, and plans to cull another $1.7 billion worth of spending in the next two years alone, with plans to ultimately reduce its costs by a total of $7.7 billion from 2023 through 2027. For perspective, the drugmaker did $63.6 billion in sales last year, and turned $17.7 billion of that into adjusted net income.
Companies certainly can't cost-cut their way to growth, and while Pfizer's pipeline is promising, even assuming that some of its candidates earn approval, they won't start to produce meaningful sales for at least a couple more years. As CEO Albert Bourla conceded during Pfizer's first-quarter earnings conference call, "We know we're not going to be a strong top-line growth story for the next three years."
However, take a step back and consider the bigger picture. The company's dividend is hardly in any jeopardy, and it's becoming clearer that Pfizer's business is moving in the right direction. Tariffs won't be quite the headache for the company that they're being made out to be, either. This should all be enough to turn the stock's tide for the better sooner than later, which will dial its dividend yield back from its currently lofty 7.7%.
PepsiCo
Finally, add PepsiCo(NASDAQ: PEP) to your list of S&P 500 dividend stocks to scoop up at a bargain price.
It's strange. Although they're obviously two distinct companies, one would expect shares of PepsiCo and its larger rival, Coca-Cola, to more or less move in tandem. But no: Since 2022 Coke's stock has continued to forge its way deeper into record-high territory, while PepsiCo shares are down 64% from their late 2021 peak, and still making new lows.
What gives?
Last month's lowered full-year profit guidance in and of itself can't get all the blame, since the weakness began well before that. But that dialed-back outlook has been in the works for some time.
PepsiCo doesn't enjoy the same scale, operational flexibility, or focus that Coca-Cola does. It's also parent to snack outfit Frito-Lay as well as the Quaker Oats brand, both of which are feeling the impact of higher costs to a degree that beverage companies aren't. Frito-Lay's total revenue fell last year, for instance, as the company's price increases ultimately led to a 2.5% year-over-year decline in total sales volume. Meanwhile, Quaker's total volume slipped by a hefty 14%, dragging revenue lower just as much. PepsiCo's stock has been reflecting this headwind for just as long as it's been blowing.
As veteran investors can attest though, things change. Past performance is no guarantee of future results, which in this instance works in the company's -- and the stock's -- favor.
While the analyst community expects that stagnant sales will cause earnings per share to slip from $8.16 in 2024 to $7.97 this year, these same analysts expect a respectable top- and bottom-line recovery beginning next year that should persist into 2027. It still owns a family of very marketable brands, after all.
Just don't tarry if you see it coming, too. PepsiCo stock's forward dividend yield stands at a healthy 4.3%. That's based on a dividend, by the way, that's now been raised for 53 years in a row. That streak isn't apt to end anytime soon.
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James Brumley has positions in Coca-Cola. The Motley Fool has positions in and recommends Pfizer, Target, and Walmart. The Motley Fool has a disclosure policy.
