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3 Ways to Earn Income While the Market Swings Up and Down

By Daniel Foelber, Scott Levine, and Lee Samaha – Dec 9, 2021 at 2:00AM

Key Points

  • Waste Management stock deserves to be at an all-time high.
  • A combination of self-help initiatives and strong end markets make ABB an attractive investment.
  • Watsco is an industry stalwart in the HVAC market.

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These three dividend stocks are great buys now.

It's been a wild couple of weeks in the U.S. stock market. After falling heavily last week, the three major indices -- the S&P 500, Nasdaq, and Dow Jones Industrial Average -- are all left nearly unchanged.

While it's true that volatile markets present opportunities to buy good companies at a discount, they can also be emotionally taxing. A simple, hands-off approach for navigating volatility is to invest in dividend stocks. Waste Management (WM 2.86%), ABB (ABB 2.59%), and Watsco (WSO -0.43%) are three businesses with track records for generating strong results and raising their dividends even in uncertain times. Here's what makes each a great buy now.

Kids are recycling products into waste receptacles in a street.

Image source: Getty Images.

As even-keeled as they come

Daniel Foelber (Waste Management): Share prices of Waste Management are hovering around an all-time high. Deservingly so, as the company continues to grow its top line, maintain strong profitability, and generate a lot of free cash flow (FCF).

WM Revenue (Quarterly) Chart

WM Revenue (Quarterly) data by YCharts

Waste Management's business consists of the collection, transportation, processing, and disposal or reuse of trash and recycled products. The company benefits from a rising population that consumes and wastes more stuff. But it also has an environmental, social, and governance (ESG) side to it as well. Not only is Waste Management a leader in recycling, but its landfills offer a way for it to compete in the growing field of renewable natural gas (RNG).

The decomposition of organic material in landfills, wastewater, dairy manure, and waste from the agricultural industry emits a lot of methane. Capturing and reusing that methane is a way to produce an alternative fuel that is more environmentally friendly than fossil fuels like diesel and natural gas. Waste Management has yet to monetize RNG in a meaningful way, but it's an industry that presents a long-term growth opportunity. 

Waste Management's dividend yield is just 1.4%. But that's mainly due to its stock's impressive multi-year performance. For what it can control, Waste Management has done a great job raising its dividend. 2021 marks the 18th consecutive year it has increased its annual payout. For investors looking for an industry leader whose business can thrive no matter what the economy or the market is doing, there are few better options than Waste Management.

^SPX Chart

^SPX data by YCharts

Growth, value, and dividends all in one stock

Lee Samaha (ABB): The European industrial giant ABB often gets overlooked due to a history of poor performance. But under CEO Bjorn Rosengren, there are real signs of change.

The company has long held some desirable assets positioned for long-term growth. For example, it's the second-largest global player in automation and robotics, and the world leader in motion control (industrial motors and drives). Moreover, its electrification business is primed to benefit from the electrification trend in the economy driven by electric vehicles, renewable energy, and increased connectivity.

The problem is that this sprawling collection of businesses wasn't always as well-run as possible, or as profitable. However, that appears to be changing. In the last couple of years, non-core businesses were sold, such as the 80.1% stake in its power grids business to Hitachi, and the divestment of its mechanical power transmission business for $2.9 billion. Meanwhile, management plans to spin off its turbocharging division in 2022, and divest its power conversion division next year too. If that wasn't enough, ABB also plans to list its e-mobility business (fast chargers for electric vehicles) in 2022 while retaining a majority stake.

It's all expected to lead to an overall business growing revenue at 4% to 7% through the cycle and focused on its core automation, electrification, robotics, and motion control end markets. Throw in a 2.5% dividend yield as you wait for the restructuring actions to improve the company's growth profile, and ABB is a compelling investment option for value, growth, and dividend investors alike.

If market volatility has you heated up, this stock can help you cool off

Scott Levine (Watsco): While experienced investors know that enduring wild market swings is an inescapable aspect of investing, riding out those dips and rises can still rattle one's nerves -- especially now. With time running out to complete tasks on our end-of-the-year checklists and pressure building to find the perfect present to put under the tree, investors have enough on their plates without having to stress about the market shooting higher and lower on a daily basis. It makes sense, therefore, that many people are looking for stocks like Watsco to fortify their portfolios.

Watsco is a leading distributor of heating, ventilation, and air conditioning (HVAC) equipment throughout the Americas -- and a dividend-paying one at that. Currently, the stock offers investors a forward dividend yield of 2.5%, presenting shareholders with the opportunity to collect some passive income while they ride out the vicissitudes related to the market volatility. Circumspect investors may balk at the company's payout ratio, which has averaged 84% over the past five years; however, the dividend seems more secure than that when considering Watsco's impressive cash flow generation.

WSO Dividend Per Share (Annual) Chart

WSO Dividend Per Share (Annual) data by YCharts.

In 2020, for example, Watsco paid out $6.93 in dividends per share, and it generated FCF of $14.13 per share.

Since its incorporation in 1956, Watsco has grown to become a dominant player in the HVAC market throughout the U.S., Canada, Mexico, and Latin America, and its well-diversified customer base mitigates the risk if a few markets suffer a precipitous decline. According to Watsco, for example, no single location accounts for more than 3% of the company's revenue.

Watsco is coming off a record-breaking third-quarter performance, suggesting that the company is particularly attractive at the moment. In addition to reporting record revenue and earnings per share of $1.78 billion and $3.62, respectively, Watsco set a new high-water mark for operating cash flow: $238 million.

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 owns and recommends Watsco. The Motley Fool recommends Waste Management. The Motley Fool has a disclosure policy.

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