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3 of the Best Dividend Stocks to Buy in 2021

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These three dividend stocks appear poised to produce attractive total returns this year.

Income investors often put too much focus on a stock's dividend yield. That can cause them to get burned if the company cuts its payout. Further, it can cause them to miss out on the higher total returns often produced by the best dividend stocks, which routinely increase their payouts. 

With that upside in mind, we asked some of our contributors for their best dividend stock picks for the upcoming year. They tapped industrial giant 3M (MMM -2.08%), clean energy producer Clearway Energy (CWEN -0.43%)(CWEN.A), and global infrastructure operator Brookfield Infrastructure (BIP 0.97%)(BIPC 0.97%). Here's why this trio stands out as some of the best stocks for dividend investors in 2021. 

A person holding up a bag with the word dividends on it.

Image source: Getty Images.

A high-yield Aristocrat

Reuben Gregg Brewer (3M): When it comes to dividend stocks, there's not much that's more impressive than being a Dividend Aristocrat with 25 years' worth of dividend increases. Diversified global industrial giant 3M's (MMM -2.08%) 62 consecutive annual hikes pass that test more than two times over. You don't achieve a record like that without doing something right along the way. And while the current 3.5% yield isn't massive on an absolute basis, it is high based on 3M's historical yield range, suggesting that investors can buy this great dividend stock on sale. 

MMM Dividend Yield Chart

MMM Dividend Yield data by YCharts

So what's the catch? There are two issues, actually. First, 3M is in the highly cyclical industrial sector. Its business is feeling the pinch of the recession that started in early 2020 thanks to the coronavirus pandemic. It should get through this headwind just fine, as it has every recession in the past 62 years. More problematic is a pair of lawsuits related to production practices and product quality. These could lead to material financial costs. However, with a $95 billion market cap and a solid financial position, it's likely that 3M can weather the hit. 

All in all, 3M looks like one of the best dividend stocks you can buy in 2021, particularly if you prefer to buy stocks off of the "sale" rack.

Building on a big year

Matt DiLallo (Clearway Energy): Renewable energy producer Clearway Energy gave its investors a monster raise last year. The company boosted its payout three times, increasing it by an eye-popping 59% overall. Fueling that big-time dividend growth was the emergence of a key customer from bankruptcy -- freeing up the associated restricted cash -- and several new investments.

Clearway sees more dividend growth ahead in 2021. The company secured $450 million of new investments through the end of the third quarter, which should grow its cash available for distribution (CAFD) up to at least $1.61 per share this year. With its current dividend outlay of $0.318 per quarter ($1.27 per share annualized) putting its payout ratio at 79% -- below the low end of its 80% to 85% target range -- Clearway believes it can grow its dividend at the upper end of its 5% to 8% annual target range this year. That would push its already above-average 3.7% yield even higher.

Meanwhile, Clearway has plenty of power to continue increasing its dividend. The company ended the third quarter with enough deals in the pipeline to grow its annualized CAFD up to $1.71 per share when some of its development projects come online. Meanwhile, it has secured two more needle-moving transactions since then, giving it more power to achieve its annual dividend growth target for the next few years.

Add Clearway's high yield to its enticing growth prospects, and it stands out as a top stock for dividend investors to buy this year.

A top dividend growth stock 

Neha Chamaria (Brookfield Infrastructure Partners): Brookfield Infrastructure Partners' shares ended 2020 with roughly 11% gains, but 2021 could be an even stronger year for the stock. The global infrastructure company has entered 2021 on a strong footing, having grown its funds from operations (FFO) by 8% year over year in the third quarter.

Notably, FFO grew in all four of Brookfield's segments. For example, contracted cash flows drove Brookfield's energy segment's FFO up 15% despite the energy sector hitting a rough patch. Likewise, regulated and contracted utilities ensured a steady stream of income, driving segment FFO up 6% during the quarter. Meanwhile, acquisitions sent its data-infrastructure segment FFO up a whopping 40% in Q3.

These numbers point at two factors working in Brookfield's favor, both of which should continue to play out in 2021: cash flows originating under long-term contracts and a bounce back in key end markets after the COVID-19 pandemic induced lockdowns. Meanwhile, Brookfield's recent acquisitions -- it spent roughly $1 billion on telecom towers in India and a U.S. liquefied natural gas export facility -- should start adding value to the business beginning this year.

That creates the perfect backdrop for Brookfield's FFO to trend higher, and the perfect setting for income investors to expect higher dividends from the company. Last year, Brookfield increased its distribution by 7%, marking its 11th consecutive year of dividend increases. With strong cash flows to boot, I expect Brookfield to announce another high single-digit percentage hike in dividends in coming weeks. The potential dividend growth, along with its strong yield of 3.9%, is precisely why Brookfield Infrastructure is one of my top dividend stock picks for 2021

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Stocks Mentioned

3M Company Stock Quote
3M Company
$143.91 (-2.08%) $-3.05
Brookfield Infrastructure Partners L.P. Stock Quote
Brookfield Infrastructure Partners L.P.
$61.22 (0.97%) $0.59
Clearway Energy, Inc. Stock Quote
Clearway Energy, Inc.
$32.63 (-0.43%) $0.14
Clearway Energy, Inc. Stock Quote
Clearway Energy, Inc.
Brookfield Infrastructure Corporation Stock Quote
Brookfield Infrastructure Corporation
$71.71 (0.97%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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