It's official, the Nasdaq Composite entered a bear market on Thursday. The Dow Jones Industrial Average also entered a correction on Thursday after the S&P 500 entered a correction on Wednesday. A bear market is typically defined as a 20% or higher peak-to-trough decline, while a correction is a 10% peak-to-trough decline.
Investors looking for stable companies that can outlast a prolonged bear market have come to the right place. Investing in equal parts Emerson Electric (EMR 1.05%), 3M (MMM 0.41%), and PPG Industries (PPG -0.56%) gives an investor a dividend yield of 2.6% backed by three Dividend Kings that have raised their dividends throughout past recessions. A Dividend King is an S&P 500 component that has paid and raised its annualized dividend for at least 50 consecutive years. Here's what makes all three companies great buys now.
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Rewarding shareholders for 65 years has a funny way of building confidence
Scott Levine (Emerson Electric): Eager to generate strong passive income flow, investors can easily find themselves swooning over the large payouts of high-yield dividend stocks. Oftentimes, however, the possibility of higher yields also means the potential for more risk. Those who find themselves on the more conservative end of the risk spectrum, therefore, are eager to balance the desire for steady dividends with stalwart companies that have a long track record of rewarding shareholders, like 2.2%-yielding Emerson Electric.
The company may not be a household name, but it's likely that it's powering the various things you use on a daily basis. From the equipment necessary to fuel up your car, to thermostats that help keep you comfy at home, to the products pharmaceutical companies need to manufacture medicines, Emerson Electric meets the needs of customers in a wide variety of industries that require automation solutions as well as various others. Besides its legacy businesses, Emerson Electric's focus on future growth through nascent industries, like the burgeoning hydrogen economy, is also compelling.
On its fourth-quarter 2021 earnings call, for example, Colleen Mettler, Emerson's vice president for investor relations, noted the company's collaboration with BayoTech regarding hydrogen production. According to the agreement, Emerson Electric will "deliver advanced automation technology, software and products in support of BayoTech building hundreds of fully autonomous hydrogen units to enable hydrogen fuel cell commercial trucking fleet and abatement projects in steel and cement." This may not move the needle for Emerson Electric, which generated revenue of $18.2 billion in 2021, but it signals how the company isn't resting on its laurels. This commitment to identifying new growth opportunities suggests the company may very well continue its streak of raising its payout for years to come.
With a payout ratio that is consistently below 65% and a history of generating strong free cash flow to sustain its dividend, Emerson Electric should power up the excitement of dividend-hungry investors.
3M is too cheap to ignore
Daniel Foelber (3M): Share prices of 3M are down nearly 20% year to date, making it the third worst-performing stock in the Dow Jones Industrial Average behind Salesforce and Home Depot.
3M posted record-high revenue, net income, and earnings per diluted share in 2021. But the stock has produced a total return of negative 8% over the last five years as 3M has been caught in a multi-year period of low-single-digit top-line growth and stagnant to declining margins. That means that if you invested $100 in 3M in February 2017, you'd have just $92 now -- including dividends -- compared to $200 if you had just invested in the S&P 500. When stocks have year after year of underperformance, investors typically demand a "prove-it" moment that justifies why the stock should begin outperforming the market going forward.
While it's possible 3M will reverse its underperformance trend, I think that 3M could very well underperform the market again this year. The company has failed to offset costs due to inflation, and its margins and growth will likely tumble in 2022 compared to 2021. However, income and value investors don't typically care if a stock beats the market this year or even next year. Rather, they are focused on buying a good business at a good price. And despite its short-term woes, 3M is starting to look like a very good value.
The company has continued to raise its dividend while its stock price has slipped, which has pole-vaulted its dividend yield up to 4.1%. That makes 3M tied for the highest-yielding stock in the Dow along with Chevron.
Aside from its high yield, 3M now has a price to earnings (P/E) ratio of just 14.3. That's the lowest P/E ratio 3M has had in nine years, not to mention it's the highest dividend yield the company has had in nine years aside from the brief spring 2020 COVID-19-induced stock market collapse.
3M has its problems. But this is a giant company that is simply too cheap to ignore. 3M has paid and raised its dividend for 64 consecutive years, making it one of the longest-tenured Dividend Kings.
PPG Industries for the long term
Lee Samaha (PPG Industries): If you can close your eyes and ears to some potentially bad news over the near term, then PPG is a stock worth looking at. In reality, the value of a stock shouldn't depend on a few quarters of trading, but rather its ability to generate earnings over the long term.
As such, investors shouldn't dwell too much on the fact that the paint and coatings company faces raw material and supply chain cost headwinds in the first half of 2022. Instead, it's a good idea to focus on the long-term attractiveness of the paint and coatings industry. There's a reason why PPG is a Dividend King and its peer Sherwin-Williams is a Dividend Aristocrat.
That reason is that the paint and coatings industry tends to generate an excellent return on equity (net earnings divided by shareholders equity), or ROE. In other words, the money invested in the assets of a business tends to generate a good return.
PPG Return on Equity data by YCharts
It has such a good ROE because of a combination of the fundamental necessity of coating physical assets, be it automobiles, aircraft, packaging, ships, or buildings, and the industry has been in consolidation mode over several years.
Simply put, it's an essential industry that's consolidating to a few major players that can command better pricing and reduce costs through building scale. That's something I'd expect PPG to be able to do in the future, and when the current elevated cost environment eases, likely, more of the strong sales growth seen in 2021 (net sales up 21%) will drop into the bottom line. As such, PPG is well worth looking at as a dividend stock to buy on a dip.
