The stock market creates incredible opportunities for individual investors to grow their savings over many years. Of course, the trade-off is the occasional market correction or dip that can make it difficult for some people to stay the course. Thankfully, many companies make these down days easier to tolerate by paying out some of their profits in dividend income.
Three Motley Fool contributors recently selected three top dividend stocks that would make great investments, in part because these stocks are trading at a discount. Here's why Paramount Global (PARA -2.22%) (PARA.A), Kroger (KR -0.75%), and Williams-Sonoma (WSM 0.17%) are ripe for the picking today.
This Buffett stock pays a high-yielding dividend
Jennifer Saibil (Paramount Global): Paramount is a well-known movie studio and owns several well-regarded TV channels, but it's not one of the leading names in streaming -- yet. Paramount's paid subscriber count of 77 million pales in comparison to industry leaders Netflix and Walt Disney, which both have more than 230 million.
It's the newest incarnation of what was previously ViacomCBS, and it caught famed investor Warren Buffett's attention in May last year; his holding company Berkshire Hathaway added shares in November.
Here are some reasons, beyond Buffett's approval, why investors shouldn't count out Paramount as a media force. Its paid streaming network, Paramount+, added a record 9.9 million subscribers in the 2022 fourth quarter, more than both Netflix, which added 7.7 million, and Disney+, which actually lost 2.4 million subscribers in the most recent quarter. The added subscribers resulted in an 82% year-over-year increase in revenue for Paramount+. Paramount also owns Pluto, one of the most popular ad-supported streaming networks. As for legacy TV networks, it owns CBS and Showtime, in addition to several other popular channels.
Paramount owns some major franchises, such as Top Gun and Star Trek, that it uses to populate its streaming networks the same way Disney does. It has also been effective in creating new content to draw in viewers, such as its hit series Yellowstone, which management says is responsible for a lot of the subscription acquisitions in the fourth quarter.
Buffett is astute at recognizing when a stock appears undervalued. Trading at only 13 times trailing-12-month earnings, this could be a super deal for investors. It could be hard to know when a stock is a bargain or a value trap, but Paramount looks like a bargain considering its strong set of profit-generating networks.
At the current price, Paramount's dividend yields a juicy 4.4%. That's an attractive quality in this stock even while the price is down 78% from its previous high, and the potential for gains looks very compelling.
A recession-resilient income stock
John Ballard (Kroger): Kroger stands out for consistent sales growth in recent years. This leading grocery brand has focused on delivering value to consumers in an inflationary environment, and it's paying off. Same-store sales, excluding fuel and other adjustments, grew 5.6% for the full year, in line with its pre-pandemic growth trend.
Kroger delivered top-line growth in a challenging environment for consumers by leveraging its loyalty program that helped members save $1.4 billion. Management plans to capitalize on the shift to value by investing in more personalization in 2023, which is expected to drive further sales growth over the next few years.
Another opportunity is online delivery, which is seeing growing demand following the pandemic. While competitors like Amazon have a head start in this area, an established grocery store like Kroger could be a sleeping giant. Kroger has an advantage with a large store network that can deliver orders in less than 30 minutes to many of its customers.
The stock has doubled over the last five years, but it's currently 21% below its recent highs. The dip is a great opportunity to buy this industry leader that has proven to be resilient to macroeconomic headwinds. The stock's value is supported by an above-average 2% dividend yield, funded by the company distributing roughly half of its free cash flow to shareholders.
A well-run retailer is a rare thing
Jeremy Bowman (Williams-Sonoma): When I think of top dividend stocks that are trading at a bargain price, Williams-Sonoma is one of the first to jump to mind. The high-end home furnishings retailer, which also owns Pottery Barn and West Elm, is trading down 47% from its peak in 2021 and now trades at a price-to-earnings ratio of just 7.
Though its namesake brand dates back to 1956, Williams-Sonoma has evolved with the times and now generates roughly two-thirds of sales and profits from the e-commerce channel. As that's grown, the company has closed underperforming stores, improving its margins and allowing it to benefit from the broader tailwinds in e-commerce.
It's true that management expects earnings to take a bit of a step back this year. Much like the rest of the home goods industry that boomed during the pandemic, it's now facing a hangover from the monster growth of the last three years.
After posting comparable sales growth of 6.5% in 2022 and record adjusted earnings per share at $16.54, the company expects revenue to come in between relatively flat in 2023. It sees an operating margin of 14% to 15%, which compares to a 17.3% operating margin in 2022, implying a decline in operating income of about 16% this year. Beyond 2023, the company expects to report mid- to high-single-digit revenue growth with operating margin above 15%.
Williams-Sonoma has been aggressive in buying back stock so the company may be able to make up some of the expected profit declines by reducing its shares outstanding. The retailer also just raised its quarterly dividend by 15% to $0.90 a share, giving shareholders a 3% dividend yield.
While 2023 may be a challenging year for Williams-Sonoma, this is still a well-run retailer with a top-notch aspirational brand. It's making smart moves by growing its B2B business, its third-party marketplace, and its e-commerce channel.
At the current price, investors have a great buying opportunity.
