The U.S. stock market had another brutal week with all three major indices at or near their year-to-date lows as inflation worries and valuation concerns combined with Russia-Ukraine uncertainty. There have been seven trading weeks so far this year. Each week, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite ended the week lower than they started.
No one knows what will happen in the short term. But there are measures you can take to protect your portfolio from downside risk. The simplest solution is by investing in industry-leading companies that pay dividends.
Investing by equal parts in Caterpillar (CAT 1.59%), Chevron (CVX 0.37%), and Walmart (WMT -0.08%) stock gives an investor an average dividend yield of 2.7% and exposure to the industrials sector, the energy sector, and the consumer staples sector. After a period of four years, an investor could expect a $10,000 investment to earn over $1,000 in passive dividend income. Here's what makes each dividend stock a great buy now.
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1. Caterpillar is more balanced than you may think
When folks look at Caterpillar, they tend to think of construction. But the company does a lot more than manufacture earth-moving construction and agricultural equipment. Another big chunk of its business is serving the energy, transportation, and mining sectors -- making engines, transmissions, generator sets, marine propulsion solutions, and other products that have nothing to do with earth-moving equipment. This helps to diversify Caterpillar's revenue streams.
Aside from industry diversification, Caterpillar has sizable geographic diversification. Only 41% of its fourth-quarter 2021 revenue came from North America, which helped the company be less susceptible to domestic economic challenges.
Despite the diversification, Caterpillar will always be a cyclical business whose earnings ebb and flow with the broader economy. Even with a slew of ongoing supply-chain challenges and rising costs from inflation, Caterpillar reported its highest annual earnings per diluted share in company history in 2021.
Caterpillar's strong earnings and lower stock price have brought the company's price-to-earnings (P/E) ratio down to just 16.2. Throw in a 2.3% dividend yield and 27 consecutive years of dividend increases, and you have a Dividend Aristocrat (an S&P 500 component which has paid and raised its dividend for at least 25 consecutive years) that's also a good value.
2. It's go time for Chevron
If there's one thing that's been working in the stock market, it's the oil and gas sector. West Texas Intermediate (WTI) crude oil and Henry Hub natural gas prices -- the U.S. benchmarks -- are both at their highest levels since 2014. This compares to 2020 when both benchmarks averaged their lowest levels in over 15 years.
So how did oil and gas go from oversupplied and low-priced to expensive and undersupplied? The abridged version is that companies had been cutting capital spending for years and then curtailed production during the pandemic because demand fell off a cliff. Throw in increased investment in decarbonization and renewable energy, and you have a sectorwide supply slowdown. The subsequent economic rebound in 2021 and 2022, combined with low supply, is what's driving higher oil and gas prices.
Many leading oil and gas companies continue to focus on positive free cash flow (FCF) generation. They are choosing to make only modest increases to capital expenditures even in the face of higher commodity prices. This strategy, paired with ongoing supply-chain concerns and geopolitical factors, could result in a multi-year period of relatively high oil and gas prices. And by relatively high, we're talking above $60 per barrel WTI and $3.00 MMBtu Henry Hub.
This type of climate would be advantageous for Chevron, which made multi-billion investments in 2020 when the market was weak. It also has an industry-leading balance sheet and can achieve breakeven FCF in the low $40s per barrel of oil equivalent.
Even though Chevron stock is up around 40% in the past year, it could still be a good value if oil and gas prices fall back. Chevron stock has a dividend yield of 4.2%.
3. Walmart continues to put up impressive results
In addition to energy, the consumer staples sector continues to be a place of safety against inflation. Consumer staple companies like Procter & Gamble and Walmart have pricing power to offset higher inflation-induced costs by raising prices.
In its conference call with investors last Thursday, Walmart also pointed to its relative ease in navigating supply-chain challenges and hiring more employees. "During the fiscal year just ended, excluding divestitures, we grew net sales by 9%, grew operating profit by 18%, invested $13 billion in capex to grow our business, returned 16 billion to shareholders via share buybacks and dividends, [and] grew advertising business globally to $2.1 billion," said CEO Doug McMillon during the call.
In short, Walmart is a recession- and inflation-resistant business that continues to put up strong results. Walmart stock has a 1.7% dividend yield, which isn't particularly high. However, Walmart is just a couple of years away from being crowned a Dividend King, an S&P 500 component that has paid and raised its dividend for at least 50 consecutive years.
Add it all up, and you have a great business that's well-positioned to handle short-term headwinds.
Three income producers worth considering now
Caterpillar, Chevron, and Walmart have outlasted all kinds of market turbulence in the past and look likely to do it again. Investors seeking quality companies and a bit of passive income on the side should look no further than this diversified trio of industry leaders.
