Volatility seems to be rising in the U.S. stock market lately. We're just 10 days into the trading year, and the tech-heavy Nasdaq Composite Index has moved, on average, 1.38% per day, including two days where it fell over 2% in a single session.
| Trading Session Date | Nasdaq Composite Daily Move |
|---|---|
| Jan. 4 | (1.33%) |
| Jan. 5 | (3.34%) |
| Jan. 6 | (0.13%) |
| Jan. 7 | (0.96%) |
| Jan. 10 | 0.71% |
| Jan. 11 | 1.69% |
| Jan. 12 | 1.64% |
| Jan. 13 | (2.23%) |
| Jan. 14 | 0.59% |
| 10-day average displacement | 1.38 percentage points |
Data source: Yahoo! Finance.
Risk-averse investors who prefer stable investment options that let them sleep at night over companies with high growth potential are searching for alternatives. They may find Caterpillar (CAT -0.43%), Honeywell International (HON), and Kinder Morgan (KMI 0.40%) to be good choices now. Here's what makes each of these three value stocks a great buy now.
1. Caterpillar
Share prices of Caterpillar stock are already up over 10% year-to-date (YTD) as investors shift away from growth stocks and toward industrial stocks and energy stocks.
CAT data by YCharts
Caterpillar's 2021 didn't go exactly as planned, with the company facing ongoing supply chain issues and a slower-than-expected rebound in the broader economy, which helps explain its overall mediocre performance. Yet even with its muted results, Caterpillar is still generating sizable profits and raking in plenty of free cash flow (FCF) to support its dividend thanks to high oil and gas prices, demand for raw materials, a healthy residential construction market, and an improving commercial construction market.
Caterpillar has a price to earnings (P/E) ratio of 24.5 and a price to free cash flow (P/FCF) ratio of 22.7 -- both of which are right around its five-year median levels.
Image source: Getty Images.
2. Honeywell
Like Caterpillar, Honeywell is one of the largest and most well-known blue-chip industrial companies. Honeywell's largest segment is aerospace, which took a big hit from the COVID-19 pandemic and is still recovering. Its other business units include products and technologies for buildings, like thermostats, cybersecurity solutions, automated solutions for industrial facilities, chemicals, materials, smart energy, safety, and productivity solutions, and more. In short, Honeywell serves many small and large functions that underpin the industrial sector -- so no wonder it's the third-most-valuable U.S. industrial stock by market cap behind United Parcel Service and Union Pacific.
Honeywell updated its full-year 2021 guidance in its third-quarter release. The midpoint of the update calls for full-year sales of $34.4 billion, adjusted earnings per share (EPS) of $8.05, and FCF of $5.45 billion. At first glance, the numbers seem pretty weak considering Honeywell earned $41.8 billion in 2018 revenue and $5.61 billion in FCF. However, Honeywell's margins are improving and it has had success fighting inflationary pressures and a slow recovery in many of its business segments. All told, Honeywell is set up nicely for a strong 2022. Its business is more streamlined than ever before, suggesting that once the pandemic ends Honeywell will be in the best shape of its life.
3. Kinder Morgan
Like Caterpillar and Honeywell, Kinder Morgan should have a strong 2022. Its 2022 guidance suggests solid earnings growth and plenty of cash to support a dividend raise from $1.08 per share per year to $1.11 per share per year (split into quarterly distributions).
There's really nothing not to like about Kinder Morgan heading into 2022. Its long-term contract model gives the company a cushion in case oil and natural gas prices fall. It's keeping a tight lid on spending after making key acquisitions in 2021. And the new dividend raise gives it a 6.4% dividend yield.
On top of that, Kinder Morgan stock is trading below its 5-year median P/E ratio and P/FCF ratios, a rare bargain price for such a quality industry-leading high-yield dividend stock.
CAT PE Ratio data by YCharts
For these reasons, Kinder Morgan is my top dividend stock to buy for 2022 for investors focused on generating a good return from dividends and less concerned with outperforming the broader market.
A balanced trio
Caterpillar, Honeywell, and Kinder Morgan are all well-rounded businesses that pay attractive dividends that should grow in 2022. What's more, all three stocks are reasonable values compared to historic valuations, which isn't common in today's expensive stock market.
Equal parts of each stock give an investor a dividend yield of 3.4% -- which is high enough to supplement income in retirement or simply generate a sizable amount of passive income without having to sell a security.
