When scanning the market for dividend stocks, investors are often faced with the compromise between a high yield and a reliable yield. Top-tier dividend stocks aren't sought after because they pay out the most. Rather, their popularity stems from a track record for delivering stable and growing dividends funded by a strong underlying business.
Here's why Honeywell (HON), Kinder Morgan (KMI -0.05%), and Chevron (CVX 1.04%) are three dividend stocks worth buying and holding for at least three years.
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A diversified industrial conglomerate that does just about everything
Honeywell is one of those companies whose products and services may impact your life more than you realize. From table-top fans to advanced systems, software, and technologies used in everything from distribution centers to satellites, there's a reason why Honeywell is one of the largest industrial stocks by market capitalization.
Supply chain issues and a slowly recovering commercial airline segment have taken a toll on Honeywell's quarterly performance. In its third-quarter earnings report from Oct. 22, Honeywell cut its full-year guidance after raising it in Q2. Looking further out, however, it's clear to see that Honeywell's business is well-positioned to grow for years to come. Its healthy balance sheet and growing dividend are supported by consistent high free cash flow (FCF).
The ideal income stock
While Honeywell is rapidly investing in new products that can prepare it to be a leader in supporting the industrial Internet of Things, Kinder Morgan is more focused on gradual growth that allows it to increase its dividend. Kinder Morgan's 6% dividend yield is among the highest of S&P 500 components, and for good reason. Management continues to list the dividend and a strong balance sheet among its top priorities. On the company's Q3 earnings call on Oct 20., analysts pressured Kinder Morgan on why it wasn't spending a lot of money. Put simply, management is more interested in investing in projects that have a high probability of generating returns than haphazardly throwing money at speculative opportunities.
Kinder Morgan's balance sheet is in its best shape in five years. In 2020, the company proved it could generate enough cash to cover its dividend, even during a volatile market cycle. The one blemish on Kinder Morgan is that it has only increased its dividend for four consecutive years. Yet Kinder Morgan is now a fundamentally different business with a strategy that's built to last.
The best oil major
Kinder Morgan's fixed contracts hinder the extent to which it can capitalize on seven-year high oil and natural gas prices. While Chevron won't benefit to the same degree as smaller, more leveraged players, it's one of the more balanced ways to invest in oil and gas while collecting a large dividend.
Similar to Honeywell and Kinder Morgan, Chevron is an industry leader that has a comparatively better balance sheet than its peers. Financial strength was one of the main reasons why Chevron was able to raise its dividend in 2020 while so many of its competitors were slashing their payouts.
Despite higher oil and gas prices, Chevron has kept its spending in check, choosing to reap the benefits of last year's acquisition of Noble Energy instead of going on another shopping spree.
Investors who prefer Chevron to go on the offensive may not appreciate this strategy, but it works in the favor of dividend investors. At its current spending rate, Chevron should have plenty of cash to continue raising the dividend and buying back shares. Its diversified business that spans the entire integrated oil and gas value chain means it isn't as vulnerable to market cycles as smaller players.
A diversified basket
Looking three years into the future and setting financial goals is a little easier than, say, looking decades ahead. Investors who want to generate a specific amount of low-tax income may turn to dividend stocks. Instead of buying a stock and hoping it goes up over time, this strategy provides returns without having to sell a single share.
Honeywell, Kinder Morgan, and Chevron are three excellent dividend stocks that expose investors to a variety of industries. All three businesses generate sizable cash flow, have excellent balance sheets, and are industry leaders. Equal parts of each stock net an average yield of 4.2%, which is plenty to supplement income in retirement, keep up with inflation, or provide a meaningful amount of passive income.