March 2022 was one of the wildest months the stock market has seen since, well, probably March 2020. The Nasdaq Composite briefly entered a bear market. The S&P 500 and the Dow Jones Industrial Average were in correction territory. Now, all three indexes aren't even in correction territory anymore.
The rebound has been a relief for many investors. But unfortunately, no one knows if the market will retest those March lows.
Investors worried about higher volatility may find the advantages of high-yield dividend stocks attractive. Investing in equal parts of 3M (MMM 0.09%), Koninklijke Philips (PHG 2.13%), and Clearway Energy (CWEN -0.32%) gives an investor an average dividend yield of 3.7% and exposure to three completely different businesses. Here's what makes each a great buy now.
A 4% dividend yield you can count on
Daniel Foelber (3M): 3M stock is hovering around a 52-week low as inflation takes a sledgehammer to the company's profitability. 3M has so far proven that it lacks the pricing power or the efficiency necessary to pass along costs to customers, an issue that impacts many of its competitors, too.
So why consider 3M stock if the situation looks bleak? The investment thesis all boils down to the company's diverse business units, its valuation, its dividend yield, and its history of paying and raising the dividend.
3M is a Dow stock for a reason. The company makes everything from Scotch tape to respirators. The company's four business groups include safety and industrial, transportation and electronics, healthcare, and consumer. 3M's business may face problems. But that doesn't take away from its important role in the economy.
In addition to lower margins, 3M's revenue and earnings growth is slowing and guidance is weak. But Wall Street knows this bad news, so it is likely already baked into the company's valuation.
With a price-to-earnings ratio of just 15, 3M stock is the cheapest it has been in seven years, which may surprise investors given the S&P 500 is up more than 120% over that time frame.
Aside from its inexpensive valuation, arguably the most attractive reason to buy 3M stock now is its 4% dividend yield. 3M has paid and raised its dividend for over 50 years, making it a member of the short list of Dividend Kings. For investors who care more about value and income than growth, 3M stock is worth considering now.
All the bad news may already be in the price in this 3%-plus-yielding stock
Lee Samaha (Royal Philips): This Dutch medical technology company (properly titled Koninklijke Philips) is often seen as a safe port of calm in a storm. After all, demand for medical imaging, ultrasound, diagnostic imaging, and personal healthcare products tends to be relatively stable across market conditions in a normal business cycle.
That said, the last two years have been anything but ordinary. The pandemic, and actions taken to contain it, have led to soaring raw material costs and supply chain costs that are impacting profit margins and the ability to supply products at healthcare companies like Philips and General Electric.
In addition, Philips was negatively impacted by push-outs of customer installations due to the surge in COVID-19 cases over the winter. If that wasn't enough, acquisition-related charges and product recall largely contributed to 420 million euros of charges in the fourth quarter.
It's a lot of bad news to digest, but the market has, arguably, gone a long way. The stock now carries a 3%-plus dividend yield, and there's reason to believe its end market prospects will improve in 2022. Moreover, in common with GE's healthcare business, Philips' management believes the supply chain issues will ease in the second half of the year and that underlying demand for healthcare equipment remains strong.
Philips will see better days in the future. Indeed, management targets 3% to 5% comparable sales growth in 2022, and Wall Street analysts expect earnings per share (EPS) of 1.57 euros in 2022. The EPS figure is enough to cover the annual dividend of 0.85 euros per share. As a result, the stock is attractive to income-seeking investors. Still, anyone buying in should be willing to tolerate some potential bad near-term news as the economy struggles to deal with the impact of the conflict in Ukraine.
Charge up your passive income with this powerful play
Scott Levine (Clearway Energy): With the price of oil continuing to hover around $100 per barrel, renewable energy solutions are gaining an increasing amount of attention. Unlike oil and gas stocks, however, the options available to investors interested in clean energy are far less diverse. Nonetheless, Clearway Energy offers an excellent opportunity to add green energy exposure while boosting the amount of passive income. Currently, the stock provides dividend investors with an enticing 3.8% forward yield.
Although Clearway Energy operates conventional power assets, it's the renewable energy projects -- representing an operating capacity of more than five gigawatts (GW) -- that figure more prominently in its financials. In 2021, for example, renewable energy assets accounted for 64% of its cash available for distribution and 61% of its adjusted earnings before interest, taxes, depreciation, and amortization.
Investors should expect to see the renewable energy assets take a more prominent role in its future portfolio as the company works to bring the 1.9 GW worth of projects through its development pipeline and as it completes the sale of its thermal business (presumably in the coming months).
As the company develops the projects in its pipeline, Clearway Energy will increasingly grow its cash flow. This, in turn, will afford management the ability to grow its distribution to shareholders. How much more green can investors expect? Management forecasts growing the dividend 5% to 8% from the $1.33 it paid out in 2021 through 2026.
Oftentimes, high-yielding dividend stocks like Clearway Energy give conservative investors pause as they wonder if the high dividend is coming at the cost of the company's financial health. In the case of Clearway Energy, this doesn't seem to be the case. Over the past five years, the company's strong free cash flow has sufficiently covered the dividend. During this period, Clearway Energy averaged an annual dividend per share of $1.10 while averaging annual free cash flow per share of $3.97.