Buy These 2 Buffett-Style Dividend Aristocrat Stocks Now (2024)

My oh, my, what a difference a few weeks can make on Wall Street.

On June 16th, Bank of America's investment sentiment indicator hit 0, a level only seen in the Great Recession and the Pandemic.

The S&P is 13% off the June 16th lows (-24%), and the Nasdaq is up almost 20%.

Is this the start of the next great bull market? Or just one of the many bear market rallies that occur in recessionary bear markets?

Without a recession, the average historical bear market has three bear market rallies.

The average recessionary bear market has four, and this is the 4th rally the market has attempted so far.

I personally agree with Mike Wilson, CIO of Morgan Stanley, who just put out his weekly podcast update.

• Morgan Stanley now expects a 22% EPS decline in this recession
• $195 for the S&P 500 in 2023 EPS
• and a 15.4X trough PE
• 3,003 base case bottom for the market (-38% from all-time highs)

I'm not saying that Morgan Stanley is 100% right, and the S&P 500 will drop precisely 27% more to exactly -38%, but that would be close to the historical average bear market bottom.

• 13 to 15 trough PE
• 13% to 18% EPS decline

So if I think that stocks are likely to fall more, why don't I sell everything I own and go 3X leveraged short the Nasdaq or S&P 500 until we hit -38% in the coming months?

"The main purpose of Wall Street is to make fools of as many men as possible."

"Don't try to buy at the bottom and sell at the top. This can't be done - except by liars." - Bernard Baruch

Ask all 16 blue-chip economists whether they think this is the bear market bottom, and they'll give you 48 answers.

• the bullish case, the base case, and the bearish case

Wall Street runs on probabilities, not certainties, except for two:

• diversification increases long-term risk-adjusted returns (the only "free lunch" on Wall Street)
• over the long-term stocks always go up (97% driven by fundamentals over 30+ years)

And that's why I'm what I like to call a short-term, fully invested bear.

• I've let the market drag me to monster profits in the last 6 weeks, kicking and screaming the entire way.

Guess how often investors buying after the 20 worst 6-month periods in US market history have lost money over the next three years? Never.

How often did they lose money over the next year? Only once, during the tech crash.

What was the average 10-year return? 281%, almost 4X your money.

What does this historical return go to if we hit the worst-case scenario, a 52% peak decline (UBS stagflation hell recession with -30% EPS growth)?

• 6.9X over the next 10 years
• 14X to 28X for individual blue-chips

Over any given two to three-year period, stock returns are almost all luck.

(Sources: Dividend Kings S&P 500 Valuation & Total Return Tool, JPMorgan, Bank of America, RIA, Princeton, Fidelity)

But over 20 to 30 years? Stock returns aren't luck; they are destiny. By which I mean fundamentals.

And that's why I'm always a long-term bull on blue-chip stocks, and even when I'm 80% confident stocks will fall, I remain 100% invested and stick to my personally optimized risk management and buying plan.

The math is clear, the historical record is incontrovertible, and there are three fundamental truths that you need to remember above all else.

"Fortunes are made in bear markets". - Todd Sullivan

"Volatility isn't risk, it's the source of future returns." - Joshua Brown, CEO of Ritholtz Wealth Management

"Fortunes are made by buying right and holding on." - Tom Phelps

So let me share with you why there are three fast-growing dividend aristocrat bargains you should consider buying before everyone else does.

These aren't defensive aristocrats. They are cyclical and have been beaten down the hardest in this bear market. But they are also the ones that will roar loudest and soar fastest when the next bull market begins.

So let's take a look at why Stanley Black & Decker (SWK), and Caterpillar (CAT) are two dividend aristocrat bargains you should consider buying before this bear market ends and they become Wall Street darlings once more.

Stanley Black & Decker: Catch This Falling Dividend King With Conviction And Confidence

According to John Templeton and Howard Marks, two of the greatest investors in history, you can only ever be 80% confident about any company.

• 80% is the Wall Street certainty limit on blue-chips
• because the facts can change over time
• "die on this hill" confidence

I'm 80% certain that SWK is not a value trap.

Further Research (Comprehensive Look At The Investment Thesis, Growth Outlook, Risk Profile, and Valuation And Total Return Potential)

Reasons To Potentially Buy SWK Today

• 86% quality low-risk 12/13 Super SWAN dividend king
• the 143rd highest quality company on the Master List (71st percentile)
• 89% dividend safety score
• 55-year dividend growth streak

• 3.4% very safe yield
• 0.5% average recession dividend cut risk
• 1.6% severe recession dividend cut risk
• 33% historically undervalued (potential very strong buy)
• Fair Value: $138.70
• 16.6X forward earnings vs. 16.5X to 18.5X historical
• A- stable credit rating = 2.5% 30-year bankruptcy risk
• 71st industry percentile risk management consensus = good
• 6% to 12% CAGR margin-of-error growth consensus range
• 9.4% CAGR median growth consensus
• 5-year consensus total return potential: 18% to 22% CAGR
• base-case 5-year consensus return potential: 19% CAGR (4X more than the S&P consensus)
• consensus 12-month total return forecast: 41%
• Fundamentally Justified 12-Month Returns: 53% CAGR

Analysts expect SWK to deliver 41% total returns over the next year. If it grows as expected and returns to historical fair value, a 53% total return would be justified.

This low-risk Super SWAN quality dividend king hasn't missed a dividend payment in 145 years, not even through eight DEPRESSIONS!

• Bank of America thinks US GDP contracts by 0.2% next year, the mildest recession in US history.
• Deutsche bank thinks it contracts 0.5%, the 2nd mildest recession in US history.

And guess who else agrees with me about SWK's ability to weather this temporary downturn in its business?

• rating agencies (Moody's rates it Baa1, BBB+ equivalent with a negative outlook, S&P A stable outlook)
• the bond market: 3.81% 30-year default risk consistent with an A- credit rating
• 20 analysts who collectively know this company better than anyone other than its excellent management team

75% Consensus EPS Growth Coming Out Of This Recession

Is this a bad downturn for SWK? It's an earnings collapse on par with the Great Recession.

But analysts expect that SWK will grow its earnings 75% in 2023 and 2024.

• 25% in 2023
• 40% in 2024

Does this sound like a value trap to you? A company headed to zero?

Management growth guidance pre-earnings was 10% to 12% long-term growth.

• And potentially deliver 28% annual Buffett-like returns to anyone capable of being "greedy when others are fearful".

How often has SWK had a yield this generous? About 7% of the time... over the last 25 years.

Do you know what the analyst consensus expects once you get beyond 2022's earnings crash? 9.4% CAGR long-term growth.

(Sources: Morningstar, FactSet, Ycharts)

Is Stanley a hyper-growth stock? No.

But with a yield this attractive and very safe, it doesn't have to be to deliver close to 13% long-term returns; that's more than the aristocrats and S&P are offering.

SWK Rolling Returns Since 1985

Since 1985 SWK has averaged 14% annular returns and long-term returns of 10% to 11%, slightly better than the S&P 500.

But from bear market lows? Returns as strong as 122% in the next year and 20% Buffett-like returns for the next decade.

• 6X over 10 years
• returns as strong as 10X over the next 15 years

Inflation-Adjusted Consensus Total Return Potential: $1,000 Initial Investment

(Source: DK Research Terminal, FactSet)

Analysts think SWK has the potential to deliver 19X inflation-adjusted returns over the next 30 years, the standard retirement time frame.

(Source: DK Research Terminal, FactSet)

That's potentially 2X the S&P 500's returns and 60% better than the dividend aristocrats.

But you don't have to wait 30 years for potentially amazing returns from SWK.

SWK 2027 Consensus Return Potential

If SWK grows as expected and returns to fair value by 2027, investors could see 165% returns or almost 20% annually.

• 4X the S&P 500 consensus
• literally Buffett-like return potential from this dividend king bargain

SWK Investment Decision Score

SWK is one of the most reasonable and prudent dividend king bargains on Wall Street for anyone comfortable with its risk profile.

• 33% discount vs. 4% market premium = 37% better valuation
• 2X the much safer yield
• 30% better consensus long-term return potential
• 3X better risk-adjusted expected return over the next five years
• 2X higher consensus income over the next five years

Caterpillar: A $40 Trillion Megatrend Is Powering Its Future Growth

Further Research (Next week, I'll do a full deep dive on CAT, covering its growth prospects, investment thesis, valuation profile, total return potential, and risk profile)

• Caterpillar: Dividends And A Huge Bull Case

Reasons To Potentially Buy CAT Today

• 88% quality low-risk 13/13 Ultra SWAN dividend aristocrat
• the 104th highest quality company on the Master List (79th percentile)
• 88% dividend safety score
• 28-year dividend growth streak

• 2.6% very safe yield
• 0.5% average recession dividend cut risk
• 1.65% severe recession dividend cut risk
• 9% historically undervalued (potential very strong buy)
• Fair Value: $200.83
• 14.6X forward earnings vs. 16.5X to 9X historical
• 12.3X cash-adjusted earnings: 1.04 PEG vs. 1.54 historical
• A stable credit rating = 0.66% 30-year bankruptcy risk
• 72nd industry percentile risk management consensus = good
• 9% to 19% CAGR margin-of-error growth consensus range
• 11.8% CAGR median growth consensus
• 5-year consensus total return potential: 11% to 22% CAGR
• base-case 5-year consensus return potential: 16% CAGR (2X more than the S&P consensus)
• consensus 12-month total return forecast: 23%
• Fundamentally Justified 12-Month Returns: 12% CAGR

Earnings Update: Just A Normal Recession

Supply Headwinds Persist in Caterpillar's Second Quarter, but Demand Remains Strong:

We continue to remain positive on the demand story for Caterpillar, despite supply headwinds. The company has been pressured by the chip shortage and higher manufacturing costs over the past year, challenging its ability to meet current demand. However, we believe construction activity will continue to improve in the near term, giving us confidence that Caterpillar's products will see strong demand from customers over our forecast. In addition, we think the construction industry will benefit from increased U.S. infrastructure spending starting in 2023. Given this backdrop, we've raised our fair value estimate to $193 per share from $189. - Morningstar

Caterpillar isn't facing a lack of demand; it's just supply constrained.

And given the $40 trillion in global infrastructure spending analyst firm KPMG expects through 2050, CAT could face such a wonderful problem for decades to come.

In the second quarter, machinery sales increased 11% year on year to $13.5 billion, largely due to strong sales in North America, which grew 18% year on year. The company's machinery operating margins fell approximately 30 basis points from 2021 levels, given persistent cost inflation (materials and freight costs). That said, management noted its ability to more than offset rising costs with strong price realization. We expect Caterpillar to also raise prices in the back half of the year at a high-single-digit clip to stay ahead of inflation. For 2022, we project over 15% sales growth for Caterpillar's consolidated business. - Morningstar

Morningstar expects 15% sales growth this year and analysts, after the earnings miss, expect 15% as well.

What about the coming recession? Is CAT immune from that? Of course not.

• 2023 sales growth consensus: 7%
• 2024 consensus: 0%

But 7% growth through a global recession? Does that sound like a potential value trap?

In the near term, we think how the supply chain progresses will be the key item to watch. While we expect the remainder of 2022 to be challenging, we expect to see improvements in 2023, giving Caterpillar the ability to meet demand (the company has strong backlogs). This gives us confidence to project stronger operating margins in 2023 (15.8%) compared with 2022 (13.9%) as elevated costs start to ease. Focusing on the infrastructure opportunity, we think dealers will start to restock inventories in 2023, leading us to project over 6% sales growth on average for 2023-25.

Analysts agree with Morningstar that things won't be easy for CAT the rest of the year or the next few years. After all, we're likely headed for recession. So what kind of catastrophic earnings declines are CAT expected to face in the next two years?

• 2023 consensus: +13%
• 2024 consensus: +9%

So why is CAT in a 30% bear market? Because CAT was trading at 29X earnings at its peak, for a company with a historical PE of 17.5.

But guess what? While CAT isn't a screaming bargain today, it is a potentially good buy for anyone comfortable with its risk profile.

CAT 2024 Consensus Total Return Potential

Over the next 2.5 years, including the potential recession, analysts think CAT could deliver 16% annual returns, or 2X more than the S&P 500.

CAT 2027 Consensus Total Return Potential

Through 2027 analysts think CAT could deliver 126% total returns, or 16% annually.

• 2.5X more than the S&P 500 consensus

(Sources: Morningstar, FactSet, Ycharts)

Analysts expect CAT to potentially deliver 14% long-term returns, running circles around the aristocrats and S&P.

CAT Rolling Returns Since 1985

Since 1985 CAT's average rolling returns have been 13% to 14% CAGR, exactly what analysts expect in the future.

• the only reason CAT could be a bad buy today is if the thesis were broken
• it's not
• the same growth rate of the last 20 years is expected in the future
• and a $40 trillion megatrend makes that growth feasible

How can I be so confident about CAT?

• Management says the thesis is intact
• 28 analysts say CAT will grow at historical rates
• S&P, Fitch, Moody's, Fitch, and DBRS (Canada's largest rating agency) all have A-stable credit ratings for CAT
• the bond market via insurance policies against default (credit default swaps) says CAT's 30-year default risk is 2.4% (A-rated)
• with falling default risk over the last three months
• five additional risk rating agencies consider CAT in the 72nd percentile for long-term risk management

On one side are management and a consensus of 37 analysts, rating agencies, and the bond market.

This group has studied CAT for decades and knows it better than anyone other than its excellent management team.

And on the other are the CAT bears who are peddling fear, uncertainty, and doubt. Or simply arguing that CAT might not go up in the short-term (momentum traders).

Well, guess what I don't care about? Short-term momentum. Guess what I do care about? Helping you

Inflation-Adjusted Consensus Total Return Potential: $1,000 Initial Investment

(Source: DK Research Terminal, FactSet)

Analysts think CAT has the potential to deliver 29X inflation-adjusted returns over the next 30 years, the standard retirement time frame.

(Source: DK Research Terminal, FactSet)

That's potentially 3X the S&P 500's returns and 2.5X better than the dividend aristocrats.

29X inflation-adjusted returns from a dividend aristocrat? That's crazy, it's impossible... it's what CAT has been doing since 1985!

CAT Total Returns Since 1985

CAT is a 106X bagger over the last 37 years.

• You don't need crypto to grow your wealth 100X
• You just need patience and the world's best blue-chips

How do 38X inflation-adjusted returns that more than doubled the market sound? Like an impossible dream? No, it's literally what CAT did and could potentially keep doing for decades to come.

CAT Cumulative Dividends Since 1986: $1,000 Starting Investment

(Source: Portfolio Visualizer Premium) - dividends reinvested

Investors who bought CAT in 1986 (at a modest 1.6% yield) have enjoyed 15% annual income growth for 36 years.

• their yield on cost is now 265%

They've received over 9X their initial investment back in inflation-adjusted dividends.

• and in 2023, they will get back more than their initial investment
• adjusted for inflation

Behold the magic of long-term dividend blue-chip compounding! Behold the power of bear market bargain hunting!

CAT Investment Decision Score

CAT is one of the most reasonable and prudent fast-growing dividend aristocrat opportunities on Wall Street for anyone comfortable with its risk profile.

• 9% discount vs. 4% market premium = 13% better valuation
• 2.6% yield vs. 1.7% S&P 500 (and a much safer yield at that)
• 40% better consensus long-term return potential
• 2X better risk-adjusted expected return over the next five years
• almost 2X higher consensus income over the next five years

Bottom Line: Buy These 2 Dividend Aristocrat Bargains Before Everyone Else Does

Is this the 4th (and potentially final) bear market rally of this downturn? Or the start of a 10-year bull market?

Smart long-term investors know that those are the wrong questions to ask. The right question is, what world-class blue-chips can you entrust with your hard-earned savings in this incredible buying opportunity?

Warren Buffett started buying stocks by the billions in October 2008. He even wrote an op-ed about it in the New York Times.

The market was down 40% when Buffett started being greedy when others were fearful.

The Nasdaq was down 41%, SWK was down 44%, and CAT was down 53%. Did Buffett try to time the bottom? Heck no! He saw fat pitch opportunities, and he swung for the fences.

And guess what happened next?

After Buffett publicly told Americans to start buying stocks, the S&P fell another 33%, and CAT was cut in half... again.

What an idiot! Oracle of Omaha, my butt! Buffett was dead wrong to buy stocks in October 2008, when it was SO OBVIOUS that stocks could only keep falling.

Can you imagine the people Buffett hurt by recklessly telling them to buy US stocks in that bear market?!

Just take a look at how the "idiots" who followed Buffett's advice did!

(Sources: YCharts, Bureau of Labor Statistics)

Even with SWK down 57% off its highs, SWK investors who bought in October 2008, and then suffered another 38% decline, have achieved 7.4% annual inflation-adjusted returns!

• They almost quadrupled their money buying at "the wrong time" and holding during "the wrong time"

CAT investors are up almost 4.5X, including the current bear market.

S&P investors are up almost 7X, despite terrible market timing and an inability to see how "obvious" it was in January 2022 that the market was going to crash.

Nasdaq investors are up over 10X, despite it being so "obvious" that the Fed would tighten and tech blue-chips would crash 30% this year.

"Don't try to buy at the bottom and sell at the top. This can't be done - except by liars." - Bernard Baruch

"Don't try to time the market and nail the exact bottom. Trust me, in 10 years you'll feel like you bought the bottom." - Michael Batnick

I don't care whether SWK, CAT, or the market generally goes up, down, or sideways in the next one, two, or even three years.

If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. - Warren Buffett

I'm not here to help you score a quick 2X, 5X, or even 10X return in speculative assets like crypto, SPACs, or meme stocks.

I'm here to help you achieve 20X, 30X, or even 50X inflation-adjusted returns over decades.

Speculators try to double their money quickly. Smart investors try to change their lives through compounding over time.

Gamblers try to time the market and get lucky, and 98% of them fail. Prudent investors make their own luck by buying great blue-chips at good to great prices in times like these.

And that's why I have no qualms about recommending SWK or CAT for long-term investors today.

I am 80% confident that if you buy them as part of a diversified and prudently risk-managed portfolio today, you'll be very happy with the results in 5+ years.

Because when you buy aristocrats like these in times like these? You don't just make money; you can often retire in safety and splendor.

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