Bear markets stink. They're painful to endure and can crush the spirits of even the most upbeat investors. Thankfully, bear markets have one saving grace: They end.
With the Nasdaq Composite, S&P 500, and Dow Jones Industrial Average all up year to date, it's possible that a new bull market could be taking shape right now.
So, let's have a look at three dividend stocks investors should focus on now -- before the next bull market officially begins.
1. Union Pacific
Railroad operator UnionPacific(NYSE: UNP) is the first dividend stock worth considering. Rail transportation is a key component of the American economy, and Union Pacific is one of the major players in the industry. The company has over 32,000 miles of track, mostly west of the Mississippi River.
Along with competitors like CSX and NorfolkSouthern, Union Pacific links key seaports on the coast to vital rail gateways in the nation's interior. The company moves raw materials, industrial and agricultural products, chemicals, and finished goods across its freight network -- helping to fuel the U.S. economy. Bear in mind that railroads are a mature industry with high barriers to entry, so it stands to reason Union Pacific's business will continue to flourish. However, since the company is so tied to the health of the overall economy, a deep recession would see shares pull back.
Nevertheless, for income investors, the company's 2.5% dividend yield offers a modest -- but reliable -- stream of payments. In fact, it's been 25 years since Union Pacific last cut its dividend. And with $9.20 per share of free cash flow, the company has room to boost its dividend.
Fast-food behemoth McDonald's(NYSE: MCD) offers a classic example of how owning dividend-paying stocks can make you rich. Consider this: If you had invested $10,000 in McDonald's stock in 1973, you'd have $2.86 million today. However, if you had reinvested McDonald's dividend payments back into the stock, you'd have $7.67 million. There's no getting around it: Those dividend payments (and dividend reinvestments) really do add up.
So while a lot has changed in the last 50 years, McDonald's position as the premier fast food company has not. In recent years, the company has expanded its mobile, delivery, and digital offerings, which has helped boost revenue and market share. With about 35,000 locations spread across more than 100 countries, McDonald's size and scale are tremendous. What's more, its low prices can appeal to consumers that might wish to "trade down" as inflation remains stubbornly high.
As for its dividend, the company is in rarified air. It started paying a dividend in 1976 and has raised it each year since then. McDonald's now pays $6.08/share, yielding about 2.3%. In addition, the company's share price has grown by 182% over the last 10 years, even as overall revenue fell. How? By expanding margins. McDonald's operating margin jumped from 30% in 2013 to nearly 45% today. And with the investments the company has made in technology, such as mobile ordering, investors should expect McDonald's to keep that trend up in the future.
The final dividend stock worth owning ahead of the next bull market is ExxonMobil(NYSE: XOM). Granted, ExxonMobil (along with lots of other energy stocks) experienced a big rally over the past two years after plumbing the depths during the COVID-19 pandemic.
However, just because the company's stock price has rallied, that doesn't mean the stock is destined to crash back to Earth. In fact, as is often the case, the rising stock price is due in part to strengthening fundamentals. Exxon has paid down much of its debt during the last three years, and the company's balance sheet is much stronger as a result.
Incidentally, the improved balance sheet makes Exxon's dividend more secure. The company currently pays $3.64 per share, good for a 3.3% yield. That's not all that spectacular in the energy sector, where some companies pay dividends of well over 5%, but Exxon is playing a long game. The company is currently generating $13.62/share in free cash flow and using much of that money to pay down debt and buy back shares. Indeed, Exxon announced last December that it would buy back an additional $50 billion worth of shares.
That enormous share repurchase plan should have income investors licking their lips, as it is simply the company returning value to shareholders in another form. What's more, with oil and gas prices still well above Exxon's break-even price, a special dividend at some point in the future can't be ruled out. It's just one more reason to own this energy sector titan before the next bull market begins.
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Jake Lerch has positions in McDonald's and Norfolk Southern. The Motley Fool has positions in and recommends Union Pacific. The Motley Fool has a disclosure policy.