The stock market has posted strong performance in 2024, with the S&P 500 index climbing roughly 20% across that stretch. On the other hand, not every company included in the benchmark index has been a big winner this year.
Following recent pullbacks, some promising S&P 500 companies have been pushed down to attractive valuations. And for a few dividend-paying companies in the index, recent sell-offs have also pushed their yields higher.
If you're on the hunt for stocks that can generate passive income and deliver capital appreciation, read on to see why these fool.com contributors think that investing in Nike(NYSE: NKE) and Bath & Body Works(NYSE: BBWI), two beaten-down S&P 500 dividend stocks, would be a magnificent move right now.
Having what it takes to be a long-term winner
Keith Noonan (Nike): It's been a tough year for Nike. Growth bets in China haven't been paying off, and it doesn't look like performance on that front will improve significantly in the short term.
Making matters worse, the athletic footwear and apparel company has been facing new challenges from rising competition in the U.S. and Europe, and store closures for key retail partners, including Foot Locker, are creating more headwinds.
With its last guidance update, Nike said that it expected sales to fall roughly 10% year over year in the first quarter of its current fiscal year (ending Aug. 31). Meanwhile, management expected sales for the full fiscal year to fall by the mid-single digits.
The company's share price has declined roughly 18% year to date due to the challenging outlook, and it trades down 50% from its lifetime high.
Big sell-offs have pushed Nike's dividend yield up to roughly 1.7%, above the S&P 500 average. The yield might not look big compared to some companies in the benchmark index, but there's a good chance that it will continue to increase its payout at above-average rates.
With its last dividend increase, the company raised its payout by 9%. It has increased it by 51% over the last five years and 164% over the last decade, and it will likely serve up another substantial dividend hike this fall.
Of course, near-term payout increases won't mean much for investors if the company can't emerge from challenges and return to growth. But there are good reasons to bet on this beaten-down industry leader.
The company still has one of the world's strongest brands, along with infrastructure and distribution advantages that are unmatched in its industry. If you're seeking attractively valued dividend stocks that are capable of delivering big long-term wins, Nike looks like a smart buy right now.
A sweet-smelling cash machine
Anders Bylund (Bath & Body Works): This personal-care and home-goods company might not look like an exciting investment these days, but Bath & Body Works presents a compelling investment opportunity. The company, formerly known as L Brands, spun off Victoria's Secret(NYSE: VSCO) in 2021 to focus on the Bath & Body Works brand. Its sales have been flattish over the last three years.
But I'm not looking for a skyrocketing growth story here. If you want generous dividends backed by robust cash flows, Bath & Body Works delivers on both counts.
It pays out quarterly dividends of $0.20 per share, adding up to $0.80 in annual dividends. That works out to a 2.7% yield at current share prices. By comparison, the average yield among S&P 500 stocks is just 1.5%.
Moreover, the stock looks deeply undervalued. Bath & Body Works has some of the strongest profit margins in the specialty retail industry, ahead of market darlings like Ulta Beauty(NASDAQ: ULTA) and Five Below(NASDAQ: FIVE). The company is also an effective cash machine, converting 9% of incoming revenue into free cash flow.
Yet, its shares are changing hands at the downright gloomy valuation of 7.7 times trailing earnings, or 0.9 times sales. The stock chart shows a 39% price drop from the 52-week highs of early June and a 61% drop from its lifetime peak.
I'm not alone on the rosy side of the fence, by the way. Bath & Body Works comes with a consensus buy rating from Wall Street analysts with an average price target 48% above its current level.
Even the short-sellers are staying away from this stock. Only 4.1% of its shares are sold short at the moment, far below Ulta's 6.9% and Five Below's 8.3% short interest. Don't even get me started on Victoria's Secret, whose shares come with a risky 11.4% reading in this metric.
So you can lock in that sweet dividend yield at a low share price today, which should also set you up for robust price gains in this bull market. That's a win-win in my book.
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Anders Bylund has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike and Ulta Beauty. The Motley Fool recommends Five Below and Foot Locker. The Motley Fool has a disclosure policy.
