2022 has been a choppy year so far for the stock market. Many growth stocks are down by 60% or more from their highs, and the volatility has spilled into the industrial sector and the renewable energy industry, too. Caterpillar (CAT -0.78%), one of the world's largest makers of equipment used in the construction, oil and gas, and mining industries, is down nearly 20% from its all-time high, while renewable energy infrastructure company Brookfield Renewable Partners (BEP -1.70%) (BEPC -1.51%) is down by more than 30% from its peak.
Each of these companies has a growing business and passes along a slice of its profits to shareholders through a stable dividend. Here's what makes them great dividend stocks to buy now.
Caterpillar's business is in great shape
When looking at any stock that's down big from a high, it can be useful to wind back the clock and consider how the company and the stock market were performing at the time of the peak -- in this case, June 4, 2021.
Last June, there was high anticipation for the passage of President Biden's infrastructure bill, which will benefit companies like Caterpillar that sell earth-moving and heavy construction equipment. There was also a widespread sentiment that the worst of the COVID-19 pandemic might be behind us. What followed were the delta variant and omicron variant waves.
Last summer, companies were optimistic that supply chain concerns would subside soon, and there was a common view that the higher prices the world was experiencing would be a transient phenomenon. Today, the year-over-year inflation rate is 7.5% and the Federal Reserve is expected to begin raising its benchmark fed funds interest rate as early as March.
Add all those changes up, and it makes sense that Caterpillar stock sold off in the short term. However, the company's fundamentals show that its business rebounded nicely in 2021, and it's well-positioned to have another great year in 2022.
Caterpillar generated record-high net income in 2021 despite earning less revenue -- reflecting the fact that it's increasing its profit margins despite incurring higher raw material and shipping costs.
Caterpillar also brings in more than enough free cash flow to cover its dividend obligations, meaning that inflation could get worse and Caterpillar would still be able to support its payouts with cash. At the current stock price, its dividend yields 2.2%, and the company has raised its payouts for 27 consecutive years.
A well-rounded renewable energy investment
With investors concerned about the rising costs of capital to fund renewable energy projects, shares of Brookfield Renewable Partners are down 32% from their January 2021 high.
On the surface, the company's recent results don't look good. Its negative net income and negative free cash flow point to an unsustainable dividend. Yet look deeper, and you'll see that Brookfield Renewable's business is doing just fine.
Brookfield invests in renewable energy and decarbonizing infrastructure projects. Those projects have multidecade time horizons and inflation-resistant contracts. Therefore, a better metric to look at to gauge the business's health is funds from operations (FFO), which factors depreciation and other expenses into net income to give a more realistic representation of cash flow.
Brookfield's FFO in 2021 was $1.45 per unit, which was 10% higher than 2020. That was enough cash to fund its 5% distribution raise to $1.28 per unit -- giving it a 3.6% dividend yield at current unit prices. With more than 15 gigawatts (GW) of capacity under construction and a development pipeline exceeding 62 GW, Brookfield is a long-term investment in renewable energy that also provides a hearty passive income stream.
Two great buys now
Investors shouldn't ignore the short-term challenges that these companies -- and their industries -- face. Slowing economic growth will affect Caterpillar's business. Higher competition in the renewable energy space paired with rising interest rates will impact Brookfield Renewable. However, none of these challenges can derail the potential for each of these businesses to grow for decades to come.
Putting equal sums of money into shares of Caterpillar and Brookfield Renewable would give an investor an average dividend yield of 2.9%. Those payouts can help compensate investors for their patience as they wait for the longer-term themes to overpower the short-term headwinds and send these stocks back upward.