Consecutive cooling inflation results induced Feds to curtail its size of rate hikes to 0.25 percentage points. The central bank’s benchmark overnight lending rate is now 4.50%-4.75%, marking the highest level since October 2007.

Although investors seem optimistic, Fed Chairman Jerome Powell’s hawkish comments proposed a “couple” more rate hikes likely to come. On top of it, experts think that a persistent upward drive in interest rates would trigger a recession, causing severe pain to American workers and the stock market.

Ken Rogoff, a former chief economist at the International Monetary Fund and a professor at Harvard University, believes that the Fed should stomach somewhat higher inflation, even if it doesn’t get all the way back to its 2% goal immediately, in exchange for not sparking a recession.

The Fed sees unemployment rising to 4.6%, or 1.8 million Americans could lose their jobs in 2023, while a group of researchers, including two staff economists from the International Monetary Fund, projected that the rate could top 7%.

In addition, Goldman Sachs analysts believe a recession would send the S&P 500 plunging another 22%, while Morgan Stanley’s Mike Wilson sees a potential slide of as much as 25%. Such a sell-off could cause portfolios to lose significant value.

Against this backdrop, investors could opt for dividend stocks that ensure consistent returns to safeguard portfolios against such economic headwinds. Over the past six months, the SPDR S&P Dividend ETF’s (SDY) 4.2% gains outpaced the S&P 500’s increase of 0.8%.

Therefore, quality dividend stocks Valero Energy Corporation (VLO) and Powell Industries, Inc. (POWL) might be solid buys for investors to boost their passive income in 2023.

Valero Energy Corporation (VLO)

VLO manufactures, markets, and sells transportation fuels and petrochemical products. The company operates through its three broad segments – Refining; Renewable Diesel; and Ethanol.

In terms of forward EV/EBIT, VLO is trading at 5.45x, 28.7% lower than the industry average of 7.64x. Its forward Price/Sales multiple of 0.33 is 75% lower than the 1.31 industry average.

On January 31, 2023, VLO approved an increase of its regular quarterly dividend on common stock from $0.98 per share to $1.02 per share, payable to holders on March 16, 2023. The increase in the dividend raises the annualized dividend rate on VLO’s common stock to $4.08 per share, which yields 3.10% on prevailing prices.

The company’s dividend payouts have increased at a 2.9% CAGR over the past three years and a 7% CAGR over the five years. VLO’s four-year average dividend yield is 5.03%.

In September 2022, VLO announced that it had reduced its debt by approximately $1.25 billion through its previously announced tender offers for various series of senior notes. The company also declared a collective debt reduction of about $3.60 billion through transactions in the second half of 2021 and the first half of 2022.

In the fiscal fourth quarter that ended December 31, 2022, VLO’s revenues increased 16.3% year-over-year to $41.75 billion. Its operating income grew 169.5% year-over-year to $4.30 billion.

Furthermore, adjusted net income attributable to VLO stockholders and adjusted earnings per common share came in at $3.23 billion and $8.45, registering increases of 226.6% and 250.6% from the prior-year period, respectively.

Analysts expect VLO’s revenue and EPS for the fiscal first quarter (ending March 2023) to come in at $39.34 billion and $6.56, representing an increase of 2.1% and 184% year-over-year, respectively. Moreover, VLO has an impressive surprise earnings history, as it topped consensus EPS estimates in each of the trailing four quarters.

The stock has gained 25.5% over the past six months and 4.1% over the past month to close the last trading session at $131.73.

It’s no surprise that VLO has an overall A rating, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

VLO has an A grade for Momentum and a B for Growth, Value, and Quality. VLO is ranked #4 in the B-rated 93-stock Energy – Oil & Gas industry.

Beyond what is stated above, we have also given VLO grades for Sentiment and Stability. Get access to all VLO ratings here.

Powell Industries, Inc. (POWL)

POWL designs, develops, manufactures, sells, and services custom-engineered equipment and systems to distribute, control, and monitor electrical energy. The company’s principal products include integrated power control room substations, electrical houses, medium-voltage circuit breakers, and motor control centers.

In terms of forward EV/sales, POWL is trading at 0.72x, 60.3% lower than the industry average of 1.82x. Its forward Price/Sales multiple of 0.90 is 37.5% lower than the 1.45 industry average.

On January 31, 2023, POWL announced that its board of directors had approved a 1% increase to the quarterly cash dividend on its common stock to $0.2625 per share, equating to an annualized dividend of $1.05 per share. The dividend is payable to the shareholders on March 15, 2023.

Its annual dividend of $1.05 yields 2.29% on prevailing prices. POWL’s four-year average dividend yield is 3.65%.

POWL’s revenues increased 19% year-over-year to $126.86 million in the fiscal first quarter that ended December 31, 2022. The company’s operating income is $1.09 million for the same quarter compared to a negative $4.29 million for the quarter that ended December 31, 2021.

Net income came in at $1.16 million compared to the prior-year quarter net loss of $2.85 million, while its earnings per share came in at $0.10, from the year-ago quarter loss per share of $0.24.

POWL’s revenue is expected to rise 14% year-over-year to $154.45 million for the fiscal third quarter ending June 2023. The company’s EPS for the same quarter is expected to increase 150% year-over-year to $0.33. Additionally, POWL topped consensus EPS estimates in three of the four trailing quarters.

Shares of POWL have gained 77.3% over the past three months to close the last trading session at $45.82. It has also gained 30.3% over the past month.

POWL’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

The stock has an A grade for Growth and B grade for Value, Quality, and Sentiment. Within the A-rated Industrial – Machinery industry, it is ranked #3 out of 83 stocks.

Click here for the additional ratings of POWL (Stability and Momentum).

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VLO shares rose $1.16 (+0.88%) in premarket trading Monday. Year-to-date, VLO has gained 4.78%, versus a 6.97% rise in the benchmark S&P 500 index during the same period.

About the Author: Sristi Suman Jayaswal

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors. More...

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