Dividend Aristocrats are S&P 500 components that have paid and raised their dividends for at least 25 consecutive years. This track record speaks volumes about a company's long-term staying power and its commitment to income-focused investors. Generating passive income by holding stock allows an investor to gain a real return without having to sell the underlying security, which is an advantage when the S&P 500 is in correction territory.
Stanley Black & Decker (SWK 0.37%), NextEra Energy (NEE -0.84%), and Amcor (AMCR -0.84%) are three Dividend Aristocrats that investors can buy on sale. After a period of six 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.
Stanley Black & Decker is a hidden growth stock
Lee Samaha (Stanley Black & Decker): The tools, industrial products, and lawn and garden equipment maker is a Dividend Aristocrat with many potentials to reward investors with dividends and capital appreciation in the coming years.
Observant readers will note that I've referred to the company as more than just a tools maker. It's a reflection of the fact that the marginal growth in the business will come from its industrial and lawn and garden products businesses in 2022 and beyond.
The tools business is still the company's main earnings generator. There's no shortage of growth within it as management continues to develop its fast-growing e-commerce business and its portfolio of powerful brands such as Craftsman, DeWalt, and Stanley Black & Decker. Its brands play across the do-it-yourself (DIY) and professional markets, so the company can do well even as stay-at-home-driven demand moderates and is replaced by professional demand in non-residential construction.
That said, the real excitement in the business comes from the potential for a near-term rebound in its industrial businesses as automotive production increases and aircraft manufacturers ramp up production. Even more exciting is the medium-term opportunity to double profit margins at the two lawn and garden equipment businesses bought in 2021: MTD Holdings and Excel Industries. The two businesses are expected to add $3 billion in sales in 2022. If management succeeds in taking profit margins from high single digits to mid-teens over the medium term, then the potential for earnings growth is significant.
Now trading on less than 13 times management's guidance for free cash flow in 2022, Stanley looks like an excellent value.
This clean energy-focused, regulated utility pays a stable dividend
Daniel Foelber (NextEra Energy): Investors new to the stock market are probably wondering why Wall Street sentiment toward renewable energy stocks vs. oil and gas stocks can shift on a dime. In 2020, the spotlight shined on solar and wind energy stocks which crushed the S&P 500's return, while the energy sector tumbled by over 35%. It's worth mentioning that most renewable energy stocks are in the utilities, technology, or industrials sectors, while the energy sector is mostly comprised of oil and gas companies.
But since 2021, the Energy sector is up over 80%, while most solar and wind stocks are down over that time frame. The volatile and cyclical nature of oil and gas, and renewable energy industries can cause myriad migraines -- even for long-term investors.
Rising interest rates raise financing costs for new renewable energy development projects. So by that token, it does make some sense why renewable energy stocks have come under fire. The advantage that NextEra Energy has over other regulated electric utilities is that it has already built out a substantial renewable energy capacity, while the rest of its peer group struggles to catch up. Years of aggressive investing have paid off as NextEra now has the largest renewable energy capacity of any U.S. operator. And its industry-leading position is only expected to grow in the decades to come.
NextEra Energy expects adjusted earnings per share (EPS) to grow by 6% to 8% per year from 2023 to 2025 off of its projected 2022 adjusted EPS, which supports future dividend raises. In 2021, NextEra Energy became a Dividend Aristocrat, a status it is likely to retain because passing along profits to shareholders through the dividend is a core value of NextEra's strategy.
Risk-tolerant investors may prefer a pure-play solar technology company over a regulated utility. But for investors looking for long-term upside potential from the renewable energy industry and a passive income stream they know they can trust, NextEra Energy is a great stock worth considering now.
For a passive income win, pack it up, pack it in
Scott Levine (Amcor): A Dividend Aristocrat that held its initial public offering (IPO) three years ago? How can that be, you ask. Simple: It's the result of a merger between the American packaging behemoth Bemis and Australia-based Amcor in 2019. Prior to the acquisition, Bemis had consistently raised its dividend, helping to make it possible for the new stock -- which offers a juicy 4.1% forward yield -- to stand among its peers in the dividend aristocracy.
While Amcor, in its current form, doesn't have a long history upon which investors can assess the company, there are other signs that suggest the company's business model is strong. For one, Amcor has a well-diversified customer base geographically -- an especially important quality now with geopolitical tensions running extremely high. In 2021, for example, North America accounted for 37% of sales, while Western Europe and emerging markets represented 31% and 28%, respectively.
Another compelling feature of the company is its strong free cash flow: $993 million in 2021 and $985 million in 2020. The fact that Amcor's payout ratio was 105% in 2020 and 84% in 2021 may raise a red flag for circumspect investors. However, the company's average dividend of $0.4675 per share through 2020 and 2021 was well covered by the $0.60 per share of free cash flow. Management, moreover, doesn't see the flow ebbing in 2022. On the company's first-quarter 2022 conference call, management forecast 2022 free cash flow of about $1.5 billion.
For investors who are intrigued by the potential of packing this packaging leader into their portfolios, now seems like an opportune time. Shares are trading hands at 18.9 times trailing earnings, representing a discount to the S&P 500's price-to-earnings (P/E) ratio of 24.5.