Most investors buy a stock hoping its share price goes up over time. Stocks that pay dividends provide a cherry on top of this underlying investment thesis. However, income stocks flip the script. With high-yield dividend stocks, the dividend is the ice cream, and if the stock price goes up that's the cherry on top.
If you invest $10,000 into equal parts of Kinder Morgan (KMI 0.85%), Clearway Energy (CWEN +0.74%), and Schweitzer-Mauduit (SWM +0.35%) you should earn $550 in 2022 income. Here's what makes each dividend stock a great buy now.
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The more boring, the better
Daniel Foelber (Kinder Morgan): Pipeline behemoth Kinder Morgan is unlikely to wow growth-orientated investors with its stable, high-cash-flow business model. But what it lacks in flair it makes up for with one of the highest dividend yields of any S&P 500 member.
With a yield of 6.7%, Kinder Morgan's dividend isn't merely chump change. Rather, it is essentially the full investment thesis for buying the stock. Kinder Morgan's share price hasn't done much in recent years as the natural gas industry faces short-term and long-term challenges -- namely the energy transition. Kinder Morgan's response to this threat is to simply invest in safe options like pipelines in oil and gas fields that desperately need higher takeaway capacity. These new investments, as well as acquiring existing assets on the cheap, can generate a lot of free cash flow (FCF), which Kinder Morgan can then use to buy back shares and raise its dividend.
Even as the world embraces electrification, there is still likely going to be a need for Kinder Morgan's infrastructure for decades to come. The transportation and storage of natural gas is a critical element that fuels the industrial economy. Income investors looking for high-yield dividend stocks are mostly concerned with a company's ability to pay and raise its dividend, not the stock price itself. Given Kinder Morgan's low spending, vast existing portfolio, and much-improved balance sheet, the company is better suited than its peers to pay and raise its dividend over time. Investors looking to generate low-tax income from dividends in 2022 should look no further than Kinder Morgan.
A green way to passively collect plenty of green
Scott Levine (Clearway Energy): Interested in electrifying your passive income stream next year? You're not alone. Many of us get charged up at the prospect of getting paid for doing nothing. But the opportunity to feel that your investment is also doing some good -- that's an idea many of us could get behind. Therein lies the attractiveness of Clearway Energy. The company operates clean energy assets as well as conventional energy assets throughout the U.S., and its stock currently offers an attractive forward dividend yield of 3.9% thanks to a recent 1.6% raising of the payout to $0.34 per share in the fourth quarter of 2021. Looking beyond 2022, investors can expect additional hikes to the dividend; management has identified a target of raising the annual dividend 5% to 8% through 2026.
When a company proclaims ambitious dividend growth targets, the market certainly takes notice, but it means little if investors don't have confidence in the company's ability to generate sufficient capital to subsequently return to shareholders. Clearway Energy, however, appears committed to sustaining the dividend.
In late October, the company announced its plan to sell its thermal business to KKR for total consideration of $1.9 billion. Addressing the value of the divestiture and the opportunities available from its sponsor, Global Infrastructure Partners, Christopher Sotos, the company's CEO, commented, "considering our sponsor's robust development pipeline, the company is now in one of the best positions in its history to deliver long term CAFD [cash available for distribution] per share growth and economic value."
In fact, the company foresees using capital from the sale of the thermal business to develop projects in its pipeline, which could generate as much as $2.15 per share in CAFD by 2026. If Clearway Energy annually grows the dividend at 8% from the $1.36-per-share distribution where it now stands, it will be about $2 per share in 2020 -- a level that will be sufficiently covered by the $2.15 per share in CAFD.
Buy Schweitzer-Mauduit for what it could become
Lee Samaha (Schweitzer-Mauduit): This stock is for value investors and dividend investors only. The paper and materials company trades on a low valuation (13 times estimated earnings in 2021) and offers investors a 5.9% dividend yield.
However, there's a reason for the low valuation of the paper stock. It comes down to the lack of growth potential in its historical core activity, namely tobacco-related papers (called its engineered papers segment). That said, no one is buying Schweitzer-Mauduit for its exposure to tobacco. Instead, the case for buying the stock rests on the idea that the earnings and cash flow from its engineered papers segment will support the company in its acquisition-fueled drive to expand its advanced materials and structures (AMS) businesses.
Within AMS, the company manufactures resin-based nets, films, and other non-wovens for filtration, construction, medical, and industrial markets. Examples of the kind of acquisitions Schweitzer-Mauduit's management is making include the $155 million purchase of Tekra and Trient, converters of high-performance technical films, in 2020 and the $552 million acquisition of Scapa, which focuses on medical materials.
As such, the company's reliance on tobacco-based products should decline over time and be replaced by more diversified end markets. As a result, Wall Street analysts have the company trading on an enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA) of less than four in 2022. That's an excellent valuation if the acquisition strategy works. Meanwhile, you earn a 5.8% yield.
