The past few weeks have been tough for the market. Tariffs are obviously a direct threat to most companies' top and bottom lines, while the broad economic weakness they might cause is nearly impossible to predict. Investors are pricing in the risk of new knowns, and new unknowns.
However, the recent round of weakness is a buying opportunity for long-term investors. Most companies are considerably more adaptable and far more resilient than the market's currently giving them credit for, which is likely to become evident sooner than you might expect.
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Here's a closer look at three beaten-down S&P 500 dividend stocks that should be at the top of most income investors' current watchlists.
Cisco Systems
When investors think of dividend stocks, technology stocks rarely come to mind, and understandably so. Most of these companies are almost entirely focused on growth, and subsequently devote most of their income to improving and expanding their product lines.
Networking giant Cisco Systems(NASDAQ: CSCO) is a partial exception to this trend. While it's spending plenty on research and development, a sizable portion of its profits are also dished out to shareholders in the form of a dividend. The company shelled out nearly $6.4 billion worth of dividends last fiscal year, consuming more than half of its net income. Its annual per-share payout has also now been raised 13 years in a row. Although these increases aren't enormous (the most recent one was only a 3% improvement, roughly in line with long-term sales growth), newcomers will be plugging into a ticker with a healthy forward-looking yield of nearly 2.9%.
But a "forever" dividend stock?
There's no denying that the networking industry's highest-growth days are in the rearview mirror. It would also be short-sighted to ignore the fact that rivals like Arista Networks and Juniper are finally figuring out ways to compete with the industry's biggest company. However, IDC's estimate that Cisco still controls about one-third of the global ethernet switch market means its mere dominant presence will make it tough to steal share from it.
Then there's the fact that software is becoming an increasingly important component of its business mix. Although it only makes up about one-third of its top line, this is high-margin revenue, and recurring revenue. Its annualized run rate stands at nearly $30, in fact. This means Cisco will have the cash flow it needs to maintain its dividend payments and dividend growth well into the future, since this software makes up most of its networking hardware.
This dynamic is a big part of the reason this stock's down from February's record high, which may be all the discount you're going to get here.
PepsiCo
The Coca-Cola Company is most investors' go-to name within the beverage business. It's not only the biggest name in the business, but the brand has woven itself into the fabric of the culture here and abroad. Trading and investing outfit IG suggests that Coca-Cola is the world's fifth most-recognized brand name, in fact.
But the dominant name within the drinks industry arguably isn't its best investment. That honor arguably belongs to smaller rival PepsiCo(NASDAQ: PEP), for a couple of reasons.
When factoring in reinvested dividend payments during this time, since 1995, an investment in PepsiCo has easily outperformed an investment in Coca-Cola. That's despite PepsiCo stock's 25% setback since 2023, which Coca-Cola shares haven't mirrored.
Credit a combination of bigger dividend growth and more aggressive stock repurchases from PepsiCo, mostly.
The other reason an income-minded investor might want to dive into a stake in PepsiCo, now that the pullback's pumped its forward-looking dividend yield of more than 3.7%? These two companies are different in ways that matter more than ever, now that every organization is apt to begin pinching pennies.
As a consumer, you can't tell. But Coca-Cola's and PepsiCo's business models are quite different. Coca-Cola relies almost exclusively on third-party bottlers, so it can focus more time and attention on marketing and brand-building. PepsiCo, conversely, owns and operates most of its own bottling facilities, as well as the production facilities for its Frito-Lay snack arm.
Although this approach raises the company's overall operating costs, it also provides PepsiCo with fine-tuned control of its production. With every organization's operating costs on the verge of rising, this little advantage is suddenly a very big deal. It could remain a big deal for a long time, too.
Pfizer
Finally, add drugmaker Pfizer(NYSE: PFE) to your list of dividend stocks to buy and hold forever while you can plug into its forward-looking dividend yield of 7.8%.
The past few years have been tough ones here. While Pfizer's stock soared during and because of the COVID-19 pandemic (its Paxlovid is one of only a handful of approved treatments for the coronavirus), the company's found nothing to fully offset the waning demand for the drug in the meantime. That's why shares have dwindled since late 2021, reaching a new multiyear low this week after Pfizer decided to stop development of GLP-1 weight-loss drug Danuglipron. Investors are growing understandably frustrated. Never even mind the effect of possible fresh tariffs on drugs that American companies are manufacturing overseas and importing into the United States.
The thing is, there's nothing terribly unusual or unsurvivable about the company's current rough patch.
The pharmaceutical business regularly ebbs and flows, in step with regulation as well as research and development capabilities. It's also one that -- despite the industry's best efforts -- often leaves drug companies dependent on just one or two products for the lion's share of their business. Roughly 40% of Merck's sales are driven by its cancer-fighting drug Keytruda, for example.
That's what's been missing for Pfizer for the past several years. As its coronavirus business continues to shrink, there's nothing in its current portfolio stepping up and filling that gap. Outside of its waning COVID-related business, in fact, nothing else accounts for more than about one-tenth of its total sales, and none of these drugs are seeing great growth right now.
It's coming, though. The drugmaker expects four new drug approvals this year, including the approval of Abrysvo as a treatment for RSV (respiratory syncytial virus) and Braftovi for certain types of colon cancer. We'll also hear phase 3 trial updates regarding Elrexfio, Tukysa, and sasanlimab, all underscoring Pfizer's newfound interest in oncology now that most of the COVID opportunity is in the rearview mirror.
The iconic company's R&D pipeline still isn't quite as robust as most investors might like. It's coming around, though, slowly and methodically. Pfizer also has a long, healthy history of acquiring blockbuster drugs, as it did with Lipitor.
Now down more than 60% from its peak, none of its likely long-term bullish future is reflected in the stock's current price.
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James Brumley has positions in Coca-Cola. The Motley Fool has positions in and recommends Arista Networks, Cisco Systems, Merck, and Pfizer. The Motley Fool has a disclosure policy.
