2 Magnificent Dividend Stocks Down 33% and 39% to Buy Right Now While Their Dividend Yields Are Near Once-in-a-Decade Highs

One of my favorite pairings when looking for passive income on the stock market is to find companies with safe, steady operations with dividend yields that are near 10-year highs. While finding this combination isn't exactly common, chocolatier The Hershey Company (NYSE: HSY) and quick-service food franchisor MTY Food Group (OTC: MTYF.F) currently meet these requirements.

With Hershey and MTY down 12% and 20% from their 52-week highs -- and 33% and 39% below their all-time highs -- investors would be wise to consider these two magnificent dividend stocks at discounted prices.

Here's why buying Hershey and MTY makes for a compelling investment proposition, with their 2.9% and 2.3% dividend yields near a decade-long high.

Hershey: Safety and stability in chocolates and snacks

Perhaps the most persuasive reason to consider buying The Hershey Company is its stability. Operating in the recession-resistant industries of chocolates and sweet and salty snacks, Hershey is undeniably steady, as evidenced by its 0.37 five-year beta.

Beta measures a stock's volatility compared to the broader market, and a beta below 1 implies that a stock is less likely to plunge during bear markets. Stocks with a beta as low as Hershey's are what I would consider "bedrock" types of holdings that you can use as a foundational piece in any of your portfolios -- which is why it is one of my daughter's nine core portfolio positions.

With that said, the company's current 33% drawdown from its all-time high is its third-largest of the last three decades, only smaller than its 50% and 40% drops during the 2008 and 2000 crashes.

So, does this drop show that Hershey is damaged goods since the broader market is still up?

Not so much. First, prior to this decline, the company's ratio of enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) was at an all-time high of 24. For perspective, Hershey's current EV/EBITDA ratio is 15, and its historical average as a publicly traded stock is 18, which shows just how stretched its valuation had become.

HSY EV to EBITDA data by YCharts

Furthermore, the company is facing an array of short-term headwinds ranging from implementing a new enterprise resource planning system, cocoa prices briefly quadrupling in less than two years, and a cost-conscious consumer. Ultimately, however, when investors look back at these challenges 10 years from now, I'm confident that they will have proven to be temporary and that Hershey's market-leading brands will have endured.

Anchored by the three most recognizable chocolate brands in the United States, according to Statista (Hershey, Kit Kat, and Reese's), the company remains the leader of its niche. In addition to being the top banana in the chocolate world, Hershey's recent acquisitions of Skinny Pop Popcorn and Dot's Homestyle Pretzels are paying immediate dividends, with the new units growing sales by 13% and 65% annually since 2019.

And speaking of dividends, despite Hershey's challenges since early 2023, it's hiked its dividend payments twice in three quarters, raising its payout by a hefty 32%. Even after this giant increase, the dividend only uses 55% of Hershey's net income, leaving plenty of wiggle room to continue raising a dividend that is already at a decade-long high.

HSY Dividend Yield data by YCharts

Make no mistake, Hershey won't be a multibagger anytime soon. However, its 2.9% yield, leadership position, success with recent acquisitions, and steady results in the face of a multitude of short-term issues make it a magnificent bedrock holding to buy and hold for decades.

MTY Food Group's diversification throughout all seasons and varieties

Whereas Hershey's safety stems from focusing on the resilient chocolate and snacking niche, MTY Food Group's stability is thanks to its wide-ranging diversification. MTY's portfolio of roughly 90 quick-service food brands is incredibly well diversified across all four seasons and almost every imaginable cuisine.

Image Source: MTY Food Group Investor Presentation.

Dramatically oversimplifying its well-rounded portfolio, MTY's litany of frozen treats and smoothies brands lead the way in the summer, while labels like its Wetzel's Pretzels and Papa Murphy's do more of the heavy lifting in colder months.

In addition to this diversification, MTY's focus on being a franchisor -- with all but about 200 of its roughly 7,000 locations franchisee-operated -- makes it a uniquely safe investment proposition. Offloading the bulk of the risk and capital requirements to its franchisees, MTY is an asset-light operator with stable free-cash-flow (FCF) margins.

Even during the middle of the pandemic, MTY maintained a 20% FCF margin, which is actually higher than its current 15% mark. While lower consumer confidence has continued to weigh on the company's FCF margins somewhat, MTY's FCF growth over the last decade borders on art.

MTYFF Free Cash Flow data by YCharts

Making 27 acquisitions worth more than $1.7 billion in just the last decade, MTY has proven masterful at redeploying its rising FCF totals in new ventures that create even more -- a beautiful flywheel effect in motion.

However, MTY doesn't spend all of its FCF on mergers and acquisitions. Currently, the company's 2.3% dividend yield is at its highest level of the last decade outside of the 2020 crash. What makes this yield even more exciting is that it only uses 14% of MTY's FCF, meaning that the company could triple its yield to 7% and still have cash left over.

But, with shares trading with an EV/FCF ratio of only 10, management has leaned into buying back shares at a deep discount to the market. With management displaying an appetite for buying back shares after sell-offs over the last five years, MTY's current 39% drop from its all-time highs should keep it repurchasing shares hand over fist.

Since 2019, MTY has lowered its share count by 1.2% annually -- a nice addition to the cash returned to shareholders with dividends.

Altogether, MTY's steady FCF generation and serially acquisitive ways combine for a powerful compounding machine that should continue to reward investors with growing dividends for decades to come.

Don’t miss this second chance at a potentially lucrative opportunity

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See 3 “Double Down” stocks »

*Stock Advisor returns as of October 14, 2024

Josh Kohn-Lindquist has positions in Hershey and MTY Food Group. The Motley Fool has positions in and recommends Hershey and MTY Food Group. The Motley Fool has a disclosure policy.