I think right now is a great time to be looking at dividend stocks. As I see it, there are some quality businesses with shares trading at unusually low prices at the moment.
Even the best companies can be hit by temporary or short-term difficulties. And I think this is happening at the moment with both Diageo (LSE:DGE) and Starbucks (NASDAQ:SBUX).
Diageo
Diageo shares are just above their 52-week low and the stock comes with a dividend yield approaching 3%. This looks like an opportunity to me.
The issue Diageo has been facing is that its premium spirits business is more cyclical than investors realised. Demand has been falling, most notably in the US, Latin America, and the Caribbean.
This is the result of consumers looking to pull in their spending in a difficult economic environment. But this has taken the market by surprise and the stock has been falling as a result.
My view of Diageo’s brands is the opposite. I think there’s a long-term trend towards more premium drinks, but the path there is likely to be bumpy and sensitive to the broader economy.
As a result, I see this as a chance to be greedy when others are fearful. I expect the share price to recover as demand returns, so I think buying the stock now could be a good idea.
Starbucks
Starbucks has also been suffering from unusually low demand. News of revenues declining by 1.8% during the first three months of 2024 caused the stock to crash to a 52-week low.
The worst region was China, where sales fell 8%. The issue isn’t that Starbucks does a lot of business in China, it’s that the region was supposed to be a big part of the company’s future growth.
Escalating tensions between the US and China have looked like a risk to me for some time, but I don’t think the share price has ever really reflected this. That’s changed now though.
At a price-to-earnings (P/E) ratio of 22, the stock doesn’t look like an obvious bargain. But I think there’s significant potential for earnings to rise as the business recovers from a cyclical downturn.
I might be sceptical about China, but I’m optimistic about the US, where Starbucks generates around 70% of its revenues. As I see it, the prospects for a recovery there are much brighter.
Passive income
At today’s prices, I’d be happy buying shares in either Diageo or Starbucks. Both look like strong businesses that I expect to benefit from a cyclical recovery in due course.
More importantly, both stocks are trading at unusually low prices. As a result, the dividend yields are reaching levels that I think might be attractive.
Exactly how long this will last is anyone’s guess – things can turn around quickly in the stock market. That’s why I think doing more research and potentially seizing the opportunity right now could be a good idea.
