3 Beaten-Down High-Yield Dividend Stocks to Double Up on and Buy in September

Key Points

• An activist investor just bought $4 billion worth of PepsiCo stock.

• Lower energy prices have contributed to a dip in shares of ConocoPhillips.

• Near-term challenges are likely to prove temporary for industry leader Watsco.

• 10 stocks we like better than PepsiCo ›

When the broader stock market rises faster than companies can increase their payouts, the dividend yield of the major indexes will fall. That is exactly what has happened with the S&P 500 -- which yields just 1.2%.

However, there are plenty of dividend stocks to buy that provide far more passive income than the S&P 500. Here's why these Fool.com contributors believe that PepsiCo (NASDAQ: PEP), ConocoPhillips (NYSE: COP), and Watsco (NYSE: WSO) are great buys now.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

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Pepsi is dirt cheap and chock-full of potential

Daniel Foelber (PepsiCo): PepsiCo made headlines on Sept. 2 after activist investor Elliott Investment Management disclosed a $4 billion stake in the snack and beverage giant -- giving Elliott ownership of roughly 2% of the company.

In its 75-page presentation, Elliott argued that Pepsi is deeply undervalued relative to its strong brands and diverse international foothold in snacks and beverages. Pepsi has just an 18.5 forward price-to-earnings (P/E) ratio, which is dirt cheap considering the stock has historically fetched a premium valuation with a 10-year median P/E of 26.2.

If it were a card game, Elliott is saying that Pepsi has a good hand, but it just isn't playing it well. And investors have taken notice, which is why the stock has performed so poorly. As you can see in the following chart, Pepsi has barely gained in five years, while the consumer staples sector is up over 20% and its peer, Coca-Cola, is up even more.

KO data by YCharts

Activist investors can put pressure on management and even go for board seats, which can disorganize a company's leadership structure. But ultimately, Elliott's decision to build a position in Pepsi is a vote of confidence for value investors. Still, it would be a mistake to expect a turnaround overnight.

Pepsi's stock price has languished for good reason, as its earnings growth has ground to a halt. The investment thesis is largely centered around what Pepsi can do rather than what it is doing. So some investors may prefer to take a wait-and-see approach.

Turnarounds are tricky because there's a cost to changes in sentiment. Buy a stock when it's out of favor, and you could get a steal of a price in hindsight if the results and investor expectations improve. However, if the problems persist, the stock may continue to decline or at least produce mediocre results for an extended period.

Investors who agree with Elliott's reasoning may want to scoop up shares of Pepsi now. However, others who have less conviction may want to take a wait-and-see approach. Either way, Pepsi offers investors a sizable incentive to hold the stock, with a 3.8% dividend yield and 53 consecutive years of boosting the payout.

Grease the wheels of your passive income stream with ConocoPhillips

Scott Levine (ConocoPhillips): As the S&P 500 has risen more than 15% over the past year, it's clear that investors have been in buying mode.

However, ConocoPhillips stock hasn't shone as brightly on investors' radars. The oil supermajor's stock has plunged about 13% over the past year. For passive income-hungry investors, this provides a great buying opportunity to gas up on ConocoPhillips stock and its 3.2% forward-yielding dividend.

The stock's decline may be disconcerting for potential investors, but those familiar with the behavior of energy stocks are likely less worried. Since there's a strong correlation between the movements of energy stocks and those of energy prices, the 10.7% drop in oil benchmark since this time last year makes the decline in ConocoPhillips stock much more understandable.

Despite the lower energy prices, management is optimistic about the company's performance in 2025. Projecting tax benefits from the One Big Beautiful Bill and lower capital requirements, management forecasts strong free cash flow in the second half of 2025. Analysts, consequently, project the company will generate about $8 billion in free cash flow for 2025, and it forecasts that it willl continue to generate stronger free cash flow in the coming years.

With respect to the dividend, ConocoPhillips has demonstrated a conservative approach to rewarding shareholders recently. Over the past five years, the company has averaged a 42.3% payout ratio, so investors can feel fairly confident that management won't suddenly risk the company's financial well-being to reward shareholders during this period of lower energy prices.

As a leading energy stock, ConocoPhillips is a great option for investors looking to ramp up their passive income streams, and the stock's recent decline provides a great entry point.

The dip is a buying opportunity in this high-quality operator

Lee Samaha (Watsco): It's not often that you get a chance to buy a stock like Watsco on a dip and a 3% dividend yield, so now looks like a good opportunity to take advantage of. Shares are down 16.6% on a year-to-date basis as I write, with the market selling off the stock in light of weak conditions in the heating, ventilation, air conditioning, and refrigeration (HVACR) markets, in which Watsco operates.

The HVACR equipment and parts distributor has a long-established and successful business model centered on growing through the acquisition of smaller distributors within its highly fragmented distributor market. The acquisitions expand Watsco's geographic footprint, and once the newly acquired companies are integrated into Watsco's network, they benefit from the advantages of scale, new products, and technology that Watsco offers.

The problem this year comes down to softer-than-expected revenue from the new residential construction market, weakness in international markets, and some unfavorable weather patterns in the spring (cold weather tends to dampen down A/C replacement parts demand).

There's also a transition to a new class of refrigerants in the U.S., namely A2L, which is causing some near-term disruption to its operations as Watsco deals with the inventory and supply chain challenges that it brings.

That said, these challenges are likely to prove temporary. As the most significant player in a fragmented market, it wouldn't be surprising to see Watsco emerge in an even stronger position when end markets improve and the company manages its way through the refrigerant transition issue.

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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Watsco. The Motley Fool has a disclosure policy.