Stocks to buy

3 Dividend Stocks to Pick Up BEFORE the Year-End Rally

2023 has been a year for growth stocks powered by the emergence of general artificial intelligence (AI). Due to investors’ focus on growth, top dividend stocks with solid fundamentals have been in the bargain bin. Considering the valuation discounts in dividend stocks to buy, it is time to have a second look.

As everyone piles on the growth trade into year-end, it may be counter-intuitive to look elsewhere. After all, being contrarian in markets can be rewarding. Dividend stocks are a less crowded segment to consider.

As we head into year’s end, dividend stocks are in good shape. Year to date (YTD), yields have risen significantly, pressuring even the best dividend stocks. In fairness, bonds are now offering a competitive yield. However, it’s essential to remember that top dividend stocks provide dividend growth and capital appreciation.

As yields continue falling, the following dividend stocks to buy could see a renaissance. In 2023, they have underperformed the S&P 500 and are now cheaper than the market. With a good dividend growth record and bargain valuations, these stocks could rally into year-end.

Morgan Stanley (MS)

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Since the Silicon Valley Bank collapse in March, banks have been under intense selling pressure. Making matters worse, additional capital requirements proposed by U.S. regulators have kept investors from the sector. However, Morgan Stanley (NYSE:MS) differs from traditional banks and could rebound strongly.

First, although it’s a money center bank, management has done a great job at diversifying its revenue streams. Today, the bank generates almost 50% of its revenue from its wealth management division. These fee-based revenues are more stable than the much cyclical lending business.

Secondly, the investment banking business could rebound in 2024. Finally, after one year of muted activity, green shots are appearing in the IPO market. In September, Arm Holdings (NASDAQ:ARM), one of the largest IPOs, was listed successfully and well received. Also, other smaller IPOs like Maplebear (NASDAQ:CART) and Klaviyo (NYSE:KVYO) have been a success.

It appears that the market is more receptive to new listings. That’s a positive for several private companies, such as Stripe, Reddit and Shein, waiting on the sidelines. If the IPO market reopens in 2024, Morgan Stanley’s equity underwriting revenues will rebound sharply.

Based on fundamentals, MS stock is one of the dividend stocks to buy. As of this writing, it yields over 4% and is a bargain at 13 times forward earnings. The company has a stable wealth management franchise, and investment banking could bounce back in 2024.

Philip Morris International (PM)

Source: Vytautas Kielaitis / Shutterstock

After a solid performance in 2022, Philip Morris International (NYSE:PM) has underperformed this year. This sin stock had the defensive qualities to shine last year, but a rotation to growth in 2023 has left it in the bargain bin.

From a fundamental standpoint, the business continues to execute flawlessly. It’s gradually moving away from cigarettes and introducing alternatives like heated tobacco and tobacco-free oral nicotine pouches. To fast-track this transition, it acquired Swedish Match in 2022.

Swedish Match’s Zyn, a leading nicotine pouch product, has bolstered its smoke-free products. IQOS, a major Philip Morris brand, has over $10 billion in annual revenues. Zyn has been a significant addition and has over $1 billion in annualized sales. Today, over 35% of revenues are from smoke-free products.

The company has a strong market position in smoke-free products. It boasts a 75% share in heat-not-burn products and a 36% share in nicotine pouches. Additionally, in the U.S., it has a 66% market share in nicotine pouches. Presently, the company is focusing on its smoke-free transformation. Management expects that smoke-free products with substantially higher net revenue will drive growth.

In Q3, organic revenue growth was 11.3%, driven by IQOS and Zyn’s growth. U.S. Zyn growth was an impressive 66%. Overall, the acquired Swedish Match business recorded 22% top-line growth. Also, management reiterated their goal of generating over two-thirds of revenue from smoke-free products by 2030.

For 2023, management expects revenue growth of 8% and adjusted diluted EPS growth of at least 10%. The growth from smoke-free products like IQOS and Zyn makes PM stock one of the top dividend stocks to buy.

Diamondback Energy (FANG)

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As crude oil prices have declined, so has Diamondback Energy (NASDAQ:FANG), which has dropped over 10% over the past month. However, considering its prime acreage and solid shareholder returns, Diamondback is one of the top dividend stocks to buy.

Diamondback is an independent oil and natural gas producer in the Permian basin. It holds about 468,000 acres in the Midland and Delaware basin, with some of the highest-quality reserves. At the end of 2022, it had 2,033 MMBoe of proved oil and gas reserves. At current production levels, that’s 12 years’ worth of production.

The company provides a great mix of volume growth and significant free cash flow generation. In Q3 FY2023, oil production volumes were up 16% year over year (YOY). The company matched the volume growth with impressive free cash flow. It generated $820 million of FCF, equivalent to $4.58 per share.

Notably, Diamondback focuses on returning free cash flow to shareholders through repurchases and dividends. It pays a share base dividend plus a variable dividend based on the free cash flow generated. In Q3, it returned 81% of FCF, declaring a $3.37 per share dividend payout.

In terms of dividend growth, the company has a 5-year dividend growth record. Over the same period, it has compounded the annual dividend at 54.30%. Diamondback expects to distribute 75% of free cash flow. Hence, it’s a dividend investors’ dream. Buy FANG stock for capital appreciation and generous variable dividends.

On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Charles Munyi has extensive writing experience in various industries, including personal finance, insurance, technology, wealth management and stock investing. He has written for a wide variety of financial websites including Benzinga, The Balance and Investopedia.

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