3 Magnificent S&P 500 Dividend Stocks Down 19% to 26%: Is It Time to Buy the Dip?

I am an adherent to the Gardner-Kretzmann Continuum’s strategy of owning at least one stock for each year of your age. Because of this notion, I have 37 “core” holdings that I try to add to consistently over time.

However, while the S&P 500 has returned to new highs, three of my core holdings — a trio of oft-ignored dividend growth stocks — haven’t followed this move higher, and I think that’s an opportunity for investors.

Here’s why now is the time to consider buying three of my favorite S&P 500 dividend stocks on the dip, while their shares are currently down between 19% and 26% from their highs.

1. Zoetis

Zoetis (ZTS 0.06%) is the top dog in the animal healthcare industry and has outpaced the S&P 500 since its initial public offering (IPO) in 2013. Zoetis offers a range of medicines, vaccines, diagnostics, genetic tests, and precision animal health solutions for dogs, cats, and six species of livestock.

Emboldened by the “humanization of pets” megatrend, the market bid up the company’s valuation to a lofty average valuation of 47 times free cash flow (FCF) over the last decade. While Zoetis dominates its niche, this valuation was probably a little too optimistic for a company that traditionally grows its sales by high single digits, helping spur the stock’s 19% decline from its highs this year.

Now trading at a much more reasonable 31 times FCF — and with its 1.2% dividend yield near all-time highs — Zoetis looks like a once-in-a-decade opportunity.

ZTS Price to Free Cash Flow and Dividend Yield data by YCharts

Although Zoetis is already home to 17 blockbuster products that generate over $100 million annually, what makes it a promising long-term investment is its return on invested capital (ROIC) of 22%. This high ROIC implies that the company excels at utilizing its debt and equity to fund new growth initiatives, whether it’s introducing entirely new products or implementing lifecycle innovations that enhance existing ones.

Powered by this culture of continuous innovation, Zoetis has grown its FCF and dividend payments by 28% and 18% annually over the last decade, making it a top-tier compounder and dividend growth stock. Had investors bought the company at its IPO and held until today, they would be receiving a 6% dividend yield compared to their original cost basis.

With its parasiticides, dermatology, and pain products each growing sales by more than 10% in the latest quarter, Zoetis should continue to reward patient dividend investors handsomely.

2. Pool Corp.

Pool Corp. (POOL -0.21%) is the world’s largest distributor of pool products and has been a 449-bagger for investors since its IPO in 1995. However, over the last three years, its share price has stalled out.

Hindered by the confluence of higher interest rates, fewer new home starts in the United States, and weakening consumer confidence, Pool’s new pool construction and renovation orders have declined dramatically.

While this cyclicality can be uncomfortable for investors, the company is well positioned to battle this uncertainty. In fact, Pool generates 64% of its sales from non-discretionary maintenance and repair sales, such as the chemicals or replacement parts needed to keep the pool functioning. These recurring sales add a valuable layer of safety to the company’s cyclical operations.

So in trying times like today, Pool may not be firing on all cylinders — but it isn’t at risk of going bankrupt anytime soon, either. Despite the headwinds the company is facing, it generated nearly $500 million in FCF over the last year and used the bulk of this to buy back shares at a discount, while Pool’s stock is down 23% from its year-long highs.

Furthermore, Pool’s average ROIC of 18% across its lifetime as a publicly traded company demonstrates that it is more than capable of navigating cyclicality in a profitable manner.

While the timing of a turnaround in the U.S. housing market is anyone’s guess, I’m happy to pay 24 times FCF for Pool and receive growing dividend payments as we wait for sunnier days.

Now paying a 1.6% yield — its highest level since 2012 — Pool’s dividend still only uses 38% of its FCF, despite the challenging environment. These figures highlight the ample dividend growth potential available to investors once the macroeconomic environment improves for Pool.

3. Old Dominion Freight Line

Less-than-truckload (LTL) hauling specialist Old Dominion Freight Line (ODFL 0.74%) has been a 305-bagger since its IPO in 1991. However, much like Pool, Old Dominion is also a cyclical stock.

While its revenue tends to rise over the long haul, it still fluctuates over shorter time frames.

ODFL Revenue (TTM) data by YCharts

Currently in the midst of a freight industry recession, Old Dominion has seen its stock drop 26% from its year-long highs, as industrial shipments remain weak and tariff concerns continue to weigh on the market.

Despite these unavoidable headwinds, the company remains the best-in-class LTL specialist.

ODFL, XPO, SAIA, ARCB, FDX Return on Invested Capital and Profit Margin data by YCharts

This industry-leading ROIC is a significant advantage for Old Dominion, as it demonstrates management’s shrewd ability to continue taking market share by adding new service centers in a highly profitable manner.

Furthermore, its top-tier profit margin enables the company to repurchase shares during challenging economic times (as it is currently doing) and increase dividend payments more quickly when conditions improve.

Over the last decade, Old Dominion has removed more than one-sixth of its shares from the market. Meanwhile, although the company’s dividend yields only 0.6%, it has grown by 33% over the last five years and utilizes only a modest 27% of the company’s FCF.

Ultimately, when a freight industry turnaround actually occurs is impossible to know, but I’m confident Old Dominion will thrive when the good times arrive.