Want $5,000 in Passive Income? Invest $30,000 in These 3 Stocks and Wait 3 Years

Last week's Consumer Price Index report by the U.S. Bureau of Labor Statistics indicated that inflation is now 7.5% -- a 40-year high. Companies with pricing power can help pass some of those costs along to their customers. And stocks that pay dividends offer a passive income stream that helps to offset inflation too.

Investing in equal parts of Rio Tinto (RIO 0.34%), Kinder Morgan (KMI -0.11%), and Autoliv (ALV 2.13%) gives an investor an average dividend yield of 5.8% and exposure to different sectors of the economy. After a period of three years, an investor could expect a $30,000 investment to earn $5,000 in passive dividend income. Here's what makes each dividend stock a great buy now.

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Push your passive income pedal to the metal 

Scott Levine (Rio Tinto): With a market cap of nearly $130 billion, Rio Tinto is one of the largest mining stocks available to investors. Similarly, its eye-popping 8.7% forward dividend yield is a notably high option for investors looking to swim in a strong stream of passive income.

Experienced investors know that chasing a high yield can be a foolhardy endeavor. But in the case of Rio Tinto, even conservative investors can find reason to be assured that the company's high payout is not placing it in financial jeopardy.

Over the past four years, the company has averaged a payout ratio of 57%. And it doesn't seem like management's circumspect approach is waning; over the past 12 months, Rio Tinto's payout ratio is 40.3%. Skeptics, on the other hand, may place less faith in the payout ratio because mining companies can massage non-cash charges like depreciation (with respect to the value of their mineral assets) and arrive at misleading earnings figures, which in turn would skew the payout ratio. Nonetheless, consider the company's free cash flow, and the high dividend seems well-covered. Over the past five years, Rio Tinto's average annual distribution per share is $2.82 -- a period during which Rio Tinto has generated average annual free cash flow per share of $4.21.

Since the company's financial success is sensitive to the vicissitudes of market prices, the likelihood that Rio Tinto can continue returning cash to shareholders may be met with some skepticism. It's a fair point, but it's also important to recognize that the company doesn't singularly deal in the production of one mineral. Instead, it has a portfolio that reflects a diversity of assets including iron ore, copper, aluminum, lithium, and diamonds -- diversity that mitigates the risk of any single commodity suffering a downturn in pricing.

A safe bet in the oil and gas industry 

Daniel Foelber (Kinder Morgan): Rarely does an investment offer a blend of reliable income, value, and a high dividend yield. Kinder Morgan provides investors this medley, but it's a stock that is often misunderstood.

Investors pass up Kinder Morgan thinking it's a volatile oil and gas stock. But in reality, Kinder Morgan generates predictable cash flows from its pipelines, terminals, storage, and other energy infrastructure. Over 90% of its business is tied to multi-year take-or-pay and fixed-fee contracts. This predictability is what allowed Kinder Morgan to forecast its 2020 performance with 99% accuracy all the way back in April 2020. It's also why Kinder Morgan has already released its full-year 2022 forecast. 

Kinder Morgan expects to generate slightly less adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and distributable cash flow (DCF) in 2022 than it did in 2021. But its net income should come in at a five-year high.

Data source: Kinder Morgan. 

Kinder Morgan is also raising its dividend to $1.11 per share per year, representing a yield of 6.3%. Kinder Morgan's strong DCF indicates it can support its dividend with cash even as it ramps up spending on new projects and invests in growing its legacy natural gas infrastructure, liquefied natural gas, and other alternative energy investments.

Kinder Morgan may not boom as much as oilfield services companies and upstream producers during times of high oil prices. But it also won't go bust during downturns. Kinder Morgan is a great option for risk-averse investors looking to generate passive income that helps offset inflation.

Safety comes first with Autoliv

Lee Samaha (Autoliv): The airbag, seatbelt, and steering wheel company has a dominant position in the passive safety market, and it's also a safe way to play a recovery in global light vehicle production (LVP). For reference, Autoliv claimed 50% of orders in its end markets in the fourth quarter, a figure above management's target of 45% of the overall market.

It hasn't been the best of times for auto parts makers. A combination of soaring raw material costs, supply chain issues, and declines in LVP due to the auto chip shortage have slashed revenue and profit margins.

But here's the thing. Demand remains high, and auto chip makers are making massive investments to ramp up capacity. That's not to say the auto chip supply situation will ease overnight; it won't, as it takes time for new factories and expansions to come online. But it does mean supply will eventually increase.

Autoliv's management expects global LVP to increase by 9% in 2022. Moreover, given its exposure to strong trends in passenger safety and several product launches, management expects Autoliv's organic sales growth to be 20% in 2022. Throw in an easing of raw material costs and supply chain issues, and Autoliv should be well on its way to a multi-year pathway to revenue and earnings growth. Meanwhile, while you wait for that to happen, you can earn a 2.5% dividend yield at the current price. That's a compelling investment proposition.