The U.S. stock market has had an incredible run since the financial crisis. So good, in fact, that if you had invested at the worst time in October 2007, right before the big crash, you still would have more than tripled your money by today.
What's more, the S&P 500 doubled between Jan. 1, 2019, and Dec. 31, 2021. It's more challenging now to find companies for a cheap price, especially well-known industry-leading companies. One solution is to pivot away from capital gains and focus instead on generating passive income. Here's why Procter & Gamble (PG +0.56%), Kinder Morgan (KMI 1.31%), and Starbucks (SBUX +1.02%) are three completely different but equally promising dividend stocks to buy in 2022.
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A rock-solid dividend-paying stalwart
Few companies embody stability better than good old Procter & Gamble. This October, P&G will celebrate its 185th birthday. Over the last 65 years, P&G has raised its dividend every year, an accomplishment that earns it a spot on the list of Dividend Kings.
What makes P&G unique isn't just its dividend but the way it generates cash to support that dividend. P&G's business is about as recession-resilient as it gets. Demand for DayQuil, Crest toothpaste, Tide laundry detergent, Dawn dish soap, Olay lotion, Pantene shampoo, Gillette razors, Pampers diapers, and Charmin toilet paper doesn't ebb and flow with the broader economy like other industries. During an economic slowdown, consumers tend to cut their discretionary spending on things they don't need. P&G makes products that people need, and therefore, consistently posts organic growth.
For investors that value a dividend they can trust above a riskier higher yield, P&G is as good as it gets in the U.S. stock market.
A stable, high-yield natural gas company
Kinder Morgan may not have the track record for dividend raises that P&G has. But it does generate highly predictable free cash flow (FCF) to support its dividend.
Given how relatable P&G's products are, it's easy to understand why its business would thrive during a recession. Kinder Morgan is one of the largest pipeline and energy storage companies in the U.S., something that few of us can relate to. But unlike the volatile nature of oil and gas, over 90% of Kinder Morgan's business is tied to long-term fixed fee and take-or-pay contracts. Kinder Morgan isn't making money by drilling for oil, selling it, or turning oil into useful products. Rather, it's making money on the transportation of natural gas, oil, and carbon dioxide.
Thanks to its contract model, Kinder Morgan is able to forecast its revenue and earnings in advance. It hasn't even reported its full-year 2021 results but has already issued guidance for full-year 2022. It expects to raise its annualized dividend from $1.08 per share to $1.11 per share and generate $1.09 per share in net income and $2.07 per share in distributable cash flow. Since the oil and gas crash of 2014 and 2015, Kinder Morgan has drastically reduced its spending and now employs a low-growth business model focused on high cash generation to support its dividend, acquisitions, and share buybacks -- exactly the kind of strategy that income investors love.
With the dividend raise, Kinder Morgan stock will have a 6.4% dividend yield, giving it one of the top 10 highest dividend yields of S&P 500 components.
From growth stock to a staple holding for any portfolio
Not long ago, Starbucks was commonly labeled a growth stock that was disrupting the global retail coffee industry -- namely in the U.S. and China. Yet calling Starbucks a growth stock today is a bit of an exaggeration. Granted, Starbucks did report record-high revenue of $29.1 billion for its fiscal year 2021. But that's only 30% higher than what it earned five years ago.
The Starbucks of today is a mature, stable company that is known for its strong brand, international exposure, and consistency. It's also highly profitable and generates a lot of FCF that is used to back its growing dividend.
In early 2010, Starbucks paid a quarterly cash dividend of $0.05 per share. Since then, it has raised its dividend every year and now pays a quarterly dividend of $0.49 per share, giving Starbucks a 1.9% annual dividend yield. That's nearly as much as P&G. Although you could argue that P&G's dividend is safer than Starbucks's given P&G's longer track record and recession resilient business, Starbucks is growing faster than P&G and therefore could have potentially more upside through its stock performance.
A diversified income-generating basket
P&G, Kinder Morgan, and Starbucks have almost nothing in common. Yet that's exactly what a dividend investor is looking for when choosing which names to add to a diversified income basket. Equal parts of each stock expose a portfolio to a variety of industries and global markets while producing a dividend yield of 3.5%.
