Stocks to buy

Everyone’s definition of cash-cow stocks is different.

I consider cash-cow stocks to be companies whose free cash flow (FCF) is considerably higher than the capital expenditures required to keep the business running efficiently. FCF generators with high FCF yields, defined as free cash flow divided by enterprise value, are even better. 

I look for those with FCF yields above 8%, although they’re not that common given today’s inflated share prices. 

Two ETFs that select the stocks held in their funds using free cash flow yield are the Global X U.S. Cash Flow Kings 100 ETF (NYSEARCA:FLOW) and the Pacer US Cash Cows 100 ETF (BATS:COWZ). 

To ensure fairness, I’ll choose at least one stock from each ETF and ensure that each has a dividend yield of 3% or higher. 

Here are my three cash-cow stocks offering unbeatable income. 

Diamondback Energy (FANG)

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Although Diamondback Energy (NASDAQ:FANG) is held by both FLOW and COWZ in their top 10 holdings, it is officially a pick from COWZ, where it’s the second-largest holding of the ETF, weighted at 2.16%

The independent oil and gas producer yields 4.54%.

Earlier this year, the Midland, Texas company announced it would acquire Endeavor Energy Resources L.P. for $26 billion in an all-stock transaction. Endeavor shareholders will receive 117.3 million FANG shares and $8 billion in cash. Diamondback shareholders will own 60.5% of the merged entity, with Endeavor shareholders owning 39.5%. 

Diamondback shareholders approved the deal on April 26. However, the Federal Trade Commission has launched an antitrust review of the acquisition by requesting additional information from the company. Given that the FTC approved a much larger deal between Exxon Mobil (NYSE:XOM) and Pioneer Natural Resources, I can’t see the regulator saying no to the deal.       

When completed, Diamondback would own 838,000 net acres and produce 816,000 barrels of oil equivalent per day. 

With significant free cash flow generation, the combined business will easily be able to support a 4.54% dividend yield moving forward.  

Altria Group (MO)

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Altria Group (NYSE:MO) is the first of two holdings from FLOW. The cigarette company — its Marlboro brand controls 42% of the U.S. domestic cigarette market — is the ETF’s seventh-largest holding at 2.04%. Altria’s dividend yield is 8.38%, the second-highest in the S&P 500. Altria has been a dividend darling for years. 

Unfortunately, given the stagnant nature of the cigarette business, its shares have done little, losing 5.5% over the past five years. Fortunately, however, its five-year annualized total return is 5.49%, thanks to its hefty dividend.

If you treat it like an income investment rather than a capital gains play, you won’t be disappointed over the long haul. You might even be surprised by unexpected appreciation due to its move to smokeless products. 

On June 21, Altria received FDA (Food and Drug Administration) approval for its NJOY menthol e-vapor products.  

“NJOY ACE remains the only pod-based e-vapor product with marketing authorization from the FDA, and now NJOY has the first and only menthol e-vapor products authorized by the FDA to date,” stated its June 21 press release. 

Altria paid $2.75 billion in June 2023 for NJOY LLC, the cigarette and vaping company. In Q1 2024, it shipped 11.9 million units. 

Altria is moving quickly to provide less harmful products. If it can get there, the sky’s the limit for MO stock. Just don’t expect it to happen, and enjoy the income. 

LyondellBasell Industries (LYB)  

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LyondellBasell Industries (NYSE:LYB) is the second of two holdings from FLOW. At 2.01%, it is the ETF’s ninth-largest holding and has a dividend yield of 5.72%. 

As stocks go, it’s been disappointing, generating a five-year annualized total return of 7.01%. That’s somewhat in line with the specialty chemicals industry but significantly less than the 15.16% annualized total return of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

In December 2022, I included the specialty chemical company in a list of seven dividend stocks to buy and hold. At the time, LyondellBasell was undergoing organizational changes that were projected to generate an additional $750 million in recurring annual EBITDA (earnings before interest, taxes, depreciation and amortization) by 2025.

That hasn’t happened.

In Q1 2024, it reported an adjusted EBITDA of $1.06 billion, down from $1.45 billion a year ago. According to S&P Global Market Intelligence, its trailing 12-month EBITDA as of March 31 was $4.66 billion, down from $4.91 billion in 2023 and $6.26 billion in 2022.   

The good news: Of the 26 analysts still covering its stock, 34% rate it a Buy, compared to 28% at the end of 2022. 

With an FCF of $2.68 billion and an enterprise value of $41.14 billion, its FCF yield is 6.5%. Anything between 4% and 8% is fair value, while over 8% is value territory. 

Consider it like MO. Income first and capital gains second. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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