This article was co-produced with Kody Kester of Kody’s Dividends.
Market Overview: High-Quality Stocks At a Steal
There’s a rumble in the financial jungle as investors are catching wind of underpriced gems amidst a roaring S&P 500. These sturdy stocks are marked down by a substantial 10% to 19%, providing a cushion for those willing to swing the bat, while teeming with potential for future growth.
The trio of stocks not only withstands economic downturns but is also projected to provide market-thumping 8% to 25% annual total returns over the next two years and a whopping 10-year cumulative total return potential of between 264% and 556%, leaving the S&P 500’s numbers in the dust.
In contrast, the S&P 500, after a 19% drop in 2022, has come back swinging this year with an 18% rally as of November 14th. Economic indicators, such as a robust nonfarm productivity report and better-than-expected headline CPI in October 2023, are fuelling confidence about a smooth landing for the economy. However, don’t be fooled by the market’s spirited dance. A potential recession and looming earnings dip are casting shadows on the horizon.
Recently, the bond market is sounding off a siren with over 98% probability of a recession between now and 2024, hinting at a potential earnings drop while the market continues to price in earnings growth. Tiptoeing around a potential recession, now is the time to armor your portfolio against a market contraction that appears almost inevitable.
Enter these three high-quality dividend stocks, already priced for a recession, that have the potential to nearly double to quadruple the total returns of the S&P in the next two years and beyond.
Home Depot: The Undisputed Leader
The Home Depot, Inc. (HD) commands the home improvement retail sphere, sporting a towering $152.9 billion in current fiscal year revenue versus a distant $87.6 billion for its closest competitor, Lowe’s Companies, Inc. (LOW).
As the world tiptoes through a tightrope of economic certainty, Home Depot is bracing for a slight dip in sales and comparable sales before bouncing back next fiscal year, driven by long-term demographic trends and alluring professional contractor market sales.
The company’s 2.7% dividend yield, just below the industry’s safe payout threshold, coupled with a robust balance sheet and a current 13% discount to its historical fair value, spells futuristic dividends that could bolster total returns over the next decade.
Cummins Inc. (CMI): Powering the U.S. Economy
Amidst the beating heart of the American economy, Cummins Inc. (CMI) blazes the trail with its industry-leading engines, transmissions, and batteries, essential for keeping nearly three-quarters of freight weight moving smoothly across the country.
As the nation grows wealthier, it’s a no-brainer that consumption and demand for Cummins’ products to facilitate transport will surge, with the company projected to grow its earnings by an impressive 11.2% annually.
Furthermore, a well-covered 3% dividend yield and a rock-solid A+ credit rating add an extra coat of sheen to an already compelling investment, with a current 19% discount to its fair value signaling a potential stock upsurge.
Mastercard: Riding Upon a Payment Revolution
Mastercard Incorporated (MA) may play second fiddle to Visa, but its grip on the market is tight, processing almost $9 trillion of transactions in the last four quarters alone. With a solid industry growth forecast and its budding network expansion, Mastercard is set to soar with a projected 19.1% annual earnings growth.
While starting with a modest 0.6% yield, the potential for exponential dividend growth, aligned with a stable A+ credit rating, and a 10% undervaluation compared to its fair value, teases a recipe for a fruitful investment.
Summary: Unstoppable Trio for Astounding Returns
While the market flirts with uncertainty, these three powerhouses present an opportunity for investors to seize underpriced stocks with robust fundamentals, potential for explosive growth, and irresistible valuations. As you tunnel into your investment strategy, consider these high-quality stocks as a shield against an unpredictable economic climate, offering lucrative, market-beating returns for years to come.