Investing in Dividend Stocks: A Strategy for Sideways Markets

As the stock market enters a phase of sideways movement, investors may find it challenging to generate significant gains. However, there is a frequently overlooked avenue for generating returns: dividends. In fact, studies have shown that 40% of long-term gains come from dividends. This is why many corporate insiders are turning to yield plays, as they not only provide steady income but also outperform non-dividend stocks with less volatility.

John Buckingham, a value investor and the editor of the Prudent Speculator stock letter, highlights two key advantages of dividend-paying stocks. Firstly, they tend to outperform non-dividend stocks over the long run, typically 20 years or more. Secondly, they offer stability and lower volatility, making them attractive options in uncertain market conditions.

To help investors navigate this landscape, Buckingham, along with insider activity and investment researcher Morningstar, has identified five promising yield stocks. These stocks were selected based on criteria such as cash flow, balance-sheet strength, and yield. While they offer higher yields than certificates of deposit, it’s important to note that there is still inherent risk involved.

Let’s take a closer look at some of these dividend stocks:

1. Verizon Communications (VZ); dividend yield 7.8%

Verizon is a market leader in the wireless industry, commanding a 40% market share. Despite its strong position, the stock has experienced a decline of almost 20% this year, resulting in an attractive yield. The dividend appears to be safe, according to Buckingham. While there are some challenges, such as weak sales and potential lead liabilities, analysts believe the stock is oversold and presents an opportunity for capital appreciation.

2. Foot Locker (FL); dividend yield 6.3%

Foot Locker, known for unlocking the inner sneakerhead in all of us, faced a slump in sales and a sharp decline in stock value due to weak first-quarter performance. However, Buckingham remains optimistic about the company’s recovery. With its brand power, plans for better consumer connections, store closures, and improved online sales efforts, Foot Locker is poised for a potential rebound. The upcoming earnings report on August 23 will provide more insight into the company’s progress.

3. ONEOK (OKE); dividend yield 5.8%

ONEOK offers a safe investment opportunity in the expected growth of U.S. natural gas production. As the demand for liquid natural gas (LNG) export plants increases over the next decade, ONEOK’s natural gas transport system is well-positioned to benefit. With 90% of its business being fee-based, it is shielded from energy price volatility. Additionally, the recent acquisition of Magellan Midstream Partners is expected to contribute to earnings and free cash flow growth.

4. Civitas Resources (CIVI); dividend yield 9%

Civitas is an oil and gas producer operating in the DJ Basin in Colorado and the Permian Basin in Texas and New Mexico. The company has strategically acquired assets, particularly in the Permian Basin, which has created substantial value. Despite financial websites showing a lower yield, when factoring in special dividends paid out every quarter, the yield jumps to an attractive 9%. Buckingham believes that the company’s cash flow will continue to support these special dividends.

5. Park Hotels & Resorts (PK); dividend yield 4.3%

Real estate investment trusts (REITs) are an essential component of any discussion on yield investing. REITs own portfolios of income-generating properties and typically offer attractive yields. Park Hotels & Resorts, the second-largest U.S. lodging REIT, focuses on high-end hotels in key travel destinations. With travel expected to rebound to pre-pandemic levels, Park Hotels should see substantial growth. Morningstar analyst Kevin Brown estimates a fair value of $26.50 per share, suggesting significant potential upside.

While these dividend stocks present enticing opportunities, it’s important to conduct thorough research and consider the risks involved. Market conditions can change, and investors should remain vigilant. Additionally, owning REITs can complicate tax matters, so it’s advisable to consult with a tax expert before investing.

In conclusion, dividend stocks offer a reliable strategy for generating income and potential capital appreciation in sideways markets. By focusing on companies with solid cash flow, balance-sheet strength, and attractive yields, investors can position themselves for long-term success.

Disclaimer: The writer of this article owns shares of ONEOK (OKE). This article is not financial advice and should not be considered as such. Investors should conduct their own research and consult with a financial advisor before making any investment decisions.