LHX - 5 Dividend Stocks For A Year-End Market Rally

2023-10-10 10:36:00 ET

Summary

• September lived up to its billing as the worst month of the year for stocks.
• According to a report from Bank of America, stocks could be due for a fourth-quarter rally to close the year following the weak September.
• Earnings are expected to expand in Q4 which could pierce through any near-term headwinds for the time being.

The stock market endured yet another poor performance during the month of September, which was not unexpected as the month of September is historically the worst month of the year for stocks.

However, according to Bank of America (BAC), since 1950, anytime the S&P 500 has rallied more than 15% through the month of July, which is what we had in 2023, we saw an average 8% drop 15 times for the months of August and September. From August 1 through the end of September, the S&P 500 dropped 6.56%.

During those 15 instances, which have also included the past three years, we have seen a rebound from the index, averaging a fourth quarter gain of 5%.

As such, today we are going to look at 5 dividend stocks to consider buying for a potential fourth quarter rally again this year.

5 Dividend Stocks For A Q4 Rally

Dividend Stock #1 - Microsoft Corporation (MSFT)

This might be one of the easiest, so we will begin with it. Microsoft has a lot of tailwinds even after a strong run over the past year with the stock up 33%.

The most obvious tailwind for the company is AI, in which they are one of the leaders in all space. Not only does Microsoft have AI exposure through their investment in OpenAI with Chat GPT, but they are also implementing AI capabilities within their Microsoft Copilot product.

Demand remains high, more products coming with AI capabilities will translate into Microsoft being able to better monetize within AI.

For years the company's fastest-growing segment has been its cloud segment with Azure, but the growth rates have been slowing for a number of quarters now, but still strong growth nonetheless.

Another potential tailwind, which may come to fruition more in 2024 is the turnaround in the PC market, which has been down big in 2023.

Analysts are calling for 2024 EPS growth of 14%, looking for $10.95 per share which equates to a forward P/E ratio of 29.8x. This is not a cheap stock by most measures, but if we get that fourth-quarter rally like I believe we will, MSFT will be one of the leaders. For comparison purposes, shares of MSFT have traded at an earnings multiple of about 30x over the past decade.

Analysts are also high on the stock as they have an average 12-month price target of $394 for shares of MSFT, implying a 20% upside from today's levels.

Dividend Stock #2 - Nvidia Corporation (NVDA)

This second stock is a bit of cheating on my part for calling it a "dividend stock" but they do in fact pay a dividend, therefore it is a dividend stock.

Nvidia has been the pack leader for all stocks in 2023, as the market has really gone the way of NVDA. In 2023 alone, the stock is up roughly 220%, even after pulling back 12% during the month of September.

Nvidia already has the strongest chips on the market, especially when we are talking about AI. After all, they have so much demand they cannot even keep up with it.

That there alone will continue to be a tailwind for the company, but on the horizon is an even more powerful chip called Blackwell is set to debut in 2024. This chip will be even more powerful, supplementing itself as the best chipmaker in the world, but the chip will also come at a price for customers. A higher price will drive up the company's average selling price and improve margins even more.

A lot of growth is expected moving forward, which is why we see a high multiple when it comes to shares of NVDA. Analysts are looking for an EPS of $16.50 next year, which would be 53% EPS growth from 2023. This forward estimate equates to 2024 earnings multiple of 27.7x, which actually does not look all that expensive for the kind of growth the company is packing.

53 analysts cover the stock and 50 of those analysts have a buy or strong buy rating on the stock. The Average 12-month price target for shares of NVDA is $643 per share, implying a 40% upside from current levels.

Dividend Stock #3 - American Express (AXP)

Now we move away from technology the rest of the way, and that begins with a financial company by way of American Express. As you know, AXP is a credit card company, but the unique thing about AXP is how they cater to businesses and higher net worth individuals. This is especially compelling if you believe the US economy will fall into a recession in 2024.

Over the past year, shares of AXP have lagged the greater market, but are still in the green, up 5%.

However, the company has severely lagged its competitors for the past year, those being Visa (V) and Mastercard (MA). Over the past 12 months, shares of MA and V have climbed 35% and 28%, respectively, while shares of AXP have climbed only 7%, lagging well behind.

American Express should continue to have a growth path with the high-income earners, but they are also looking to attract more Millennial and Gen Z consumers.

The compelling part about AXP right now is the fact that their financials have been strong, including strong consumer spending growth, but also the valuation.

Before we look at valuation, let's look at the dividend. AXP pays a dividend of 1.6%, but they are also a dividend growth stock having increased their dividend an average of 10% per year over the past five years, including dividend hikes of 15% and 21%, respectively each of the past two years.

In terms of valuation, analysts are looking for EPS of $12.43 per share next year which equates to an earnings multiple of just 12x, which is below their 10-year average of 15.3x.

Analysts are also high on the stock as they have a 12-month average price target of $178 per share, implying a 19% upside from current levels.

Dividend Stock #4 - L3Harris Technologies ( LHX )

The next stock on our list operates in the aerospace and defense industry as a defense contractor. L3Harris has seen its stock plummet 25% over the past 12 months.

The global unrest going on with Russia's invasion of Ukraine, the war in Israel, as well as China looking to take over Taiwan has put the need for more powerful defense systems at the forefront of every nation.

The rising demand is not a new story, so why is the stock down so much you might ask? After all, orders were up nearly 20% in the most recent quarter and the company's backlog is at $25 billion. They have more work than they can handle right now, which is usually the case with aerospace industrials.

The issue with L3Harris has come around inflation and supply chain issues. Inflation is likely not going away any time soon, but I do expect to continue seeing supply chain improvements moving forward, which will help the company complete orders at a much faster pace.

L3Harris is a unique defense contractor as they not only provide products within air, land, and sea, but they also specialize in cyber and space. Space and cyber are two areas that are expected to continue growing moving forward.

Although L3Harris is more of a lesser-known dividend stock, they are nearly a dividend aristocrat having increased their dividend for 21 straight years. LHX currently has a dividend yield of 2.8% with a 5-year dividend growth rate of 14%.

There has been a sizable disconnect between the stock and the company, but that provides opportunities for long-term investors like myself. Analysts are looking for shares of LHX to generate EPS of $13.29 per share next year which equates to an earnings multiple of 12.3x. Over the last five years, shares of LHX have traded at an average earnings multiple of 18.3x.

Analysts are very high on the stock as they have a 12-month average price target of $216 per share, implying a nearly 32% upside from current levels.

Dividend Stock #5 - ConocoPhillips (COP)

ConocoPhillips is a play on the rise of crude oil prices as Conoco operates as an oil and gas producer. Towards the end of September, prices of crude topped out around $94 but fell swiftly from there down to $82 just a week later.

During the pullback in crude, shares of COP pulled back 10% over that same period. However, that gave investors who may have missed the first run in crude, another shot as I fully expect elevated oil prices to stick around for the foreseeable future, especially now that we have the unrest in the Middle East.

After the 10% pullback in the past week, shares of COP are now only up 4% on a year-to-date basis.

Russia for decades was a huge supplier of oil and gas, but since their invasion of Ukraine, many countries have cut them off. In addition, OPEC has cut their supply, leading to elevated oil prices, which only benefit oil companies like ConocoPhillips. The unrest in the Middle East will only drive oil prices further to the upside.

Higher earnings will likely lead to not only a rising dividend but also an opportunity to buy back large amounts of their own stock. Remember, when companies are able to buy back stock, the stock you already own becomes more valuable because there are now fewer shares on the open market.

Buying back stock is one thing, but when companies feel that their share price is undervalued, they buyback in big chunks. After all, management knows best about not only the current results, but the near-term potential as well.

Speaking of a discount, analysts are looking for 2024 EPS of $10.20 per share, which equates to a forward multiple of only 11.3x. For comparative purposes, shares have traded at an average multiple of 13.5x over the past decade.

Analysts have a 12-month average price target of $133 per share on shares of COP, implying a 15% upside from current levels.

Investor Takeaway

August and September were rough months for investors, but that is nothing new as they are historically the worst-performing months of the year. However, as we saw with the Bank of America Report, a strong start to the year, followed by a weak August and September has largely led to a rally to close the year.

There are plenty of headwinds to be mindful of, but with earnings set to expand in Q4, I believe investors and the market can overcome those headwinds, at least in the near-term.

In the comment section down below, let me know which of these 5 dividend stocks you agree will have a fourth quarter rally to close the year.

Disclosure: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.

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