2022 is just around the corner. The dawn of a new year is a period of hope and self-reflection. Whether you're a new investor, well into your career, or a retiree looking to generate passive income, having a successful year from a financial perspective is a shared goal among us all.
Dividend Aristocrats are members of the S&P 500 that have paid and raised their annual dividends for at least 25 consecutive years. Put another way, these companies have shown they can perform in good times and bad. Dover (DOV 1.82%), Clorox (CLX -0.70%), and Pentair (PNR 0.79%) are three of the best Dividend Aristocrats out there. Here's what makes each a great buy now.
Bring some nobility to your portfolio with this industrial stalwart
Scott Levine (Dover): While the S&P 500 has provided investors with a hefty return in 2021, there's no guarantee that it will do the same in 2022. In fact, many people are worried that the market is poised for a sharp pullback in the coming year. Experienced investors, however, recognize that enduring market sell-offs is part and parcel of achieving long-term success. This doesn't mean that investors can't fortify their portfolios for when the next market plunge occurs, helping them to sleep soundly at night while others are tossing and turning. And one smart stock to help make one's holdings more hale and hearty is Dover.
Since 1955, Dover has grown into a well-diversified business that provides products and solutions to a wide swath of industries. The company's engineered products segment, for example, provides components for the aerospace and telecommunications markets, while the pump and process solutions segment offers products to the oil and gas industry among others that deal in the handling of industrial liquids. What I find particularly appealing, though, is the company's interest in growth areas like electric vehicles and clean energy. In 2019, Dover inked an agreement with ABB to develop EV-charging infrastructure in Europe. More recently, Dover announced two acquisitions, Acme Cryogenics and RegO, that will strengthen its line of hydrogen and liquid natural gas products and solutions.
Currently, Dover's stock offers investors a modest 1.1% forward dividend yield, but what it lacks in terms of a mouthwateringly high yield, it compensates for with the security that it won't be slashed in the coming quarters. Over the past 10 years, the company has averaged a conservative payout ratio of 37%. And that's not the only perspective from which the dividend appears to be on solid ground. From 2016 to 2020, Dover returned an average of $1.87 annually to shareholders in the form of a dividend. During the same period, the company generated, on average, $4.61 in free cash flow per share. For investors looking for safe companies to buy in 2022, Dover seems to be one stock that should be on their buy lists.
An attractive dividend from an industry-leading company
Daniel Foelber (Clorox): Unlike the S&P 500, which is made up of over 29% tech stocks, most Dividend Aristocrats belong to other, more established sectors of the economy. For example, the S&P 500 Dividend Aristocrat ETF (NOBL 0.99%) is an exchange-traded fund that tracks the performance of a basket of Dividend Aristocrats. Over 50% of the fund is in blue chip consumer staple stocks, industrial stocks, and materials stocks.
Clorox is one of the consumer staple names that stands out as a good buy in 2022. After an initial surge during the pandemic, Clorox has vastly underperformed the market as its earnings came in below expectations. For its fiscal year 2021 (FY21), which ended June 30, 2021, Clorox reported much lower earnings and free cash flow than FY20 despite record-high revenue in FY21.
In its first-quarter FY22 earnings release, Clorox estimated that full-year sales would decline by between 2% and 6% and adjusted earnings per share would come in between $5.40 and $5.70, representing a forward P/E ratio of 31. Negative growth and a high forward valuation isn't exactly a good look for a company coming off a bad year. The main culprit is Clorox's spending. Advertising, sales, and administrative expenses are expected to be 25% of FY22 sales, which is going to weigh on Clorox's margins.
Given all the bad news surrounding Clorox, it may seem weird to buy the stock into what is expected to be such a disappointing year. Yet Clorox stock has already sold off, and any surprising news to the upside could help it recover. What's more, Clorox's diversified portfolio of brands far exceeds just the cleaning industry. Clorox is a balanced company poised to perform no matter the economic cycle. With a 2.7% dividend yield, Clorox is an out-of-favor stock that should be just fine over the long term.
A little-followed Dividend Aristocrat to add to your portfolio
Lee Samaha (Pentair): This was the year when the stay-at-home stocks were supposed to come up against insurmountable comparisons with 2020. The lockdown measures imposed in 2020 had profound impacts on consumer spending patterns, and one of them was the surge in spending on the home. That was of great benefit to pool equipment and water technology company Pentair.
The market expected strong growth from Pentair in the first and second quarters (easy comparisons with 2020) and then a slowing in the second half as the company started to lap tougher comparisons with 2020. That's also the reason why Pentair's management started 2021 forecasting sales growth of 7%-12% in the first quarter, leading into only 3%-5% for the full year.
However, the reality is that following three strong quarters in 2021, management's full-year sales growth guidance now stands at a whopping 21%-22%. The reason? Acquisitions have added a couple of percentage points of growth, but spending on swimming pools and products has remained popular. The interest and investment in swimming pools created by the pandemic seems to have impacted leisure habits.
Moreover, given that Pentair's residential pool products are primarily a replacement market, it's likely that the company has years of good growth ahead of it from the new pools built in the last couple of years. Putting it all together, there's every reason to believe Pentair will have another strong year in 2022.