Since March 14, the Nasdaq Composite has rallied 13%, the S&P 500 is up 8%, and the Dow Jones Industrial Average is up 5% as investors digest rising interest rates, geopolitical tensions, and other market challenges. Meanwhile, the CBOE S&P 500 Volatility Index is down 35%, signaling less fear in the stock market.
Investors who are concerned about volatility picking back up and are interested in safe stocks that generate passive income have come to the right place.
Investing in equal parts Kinder Morgan (KMI 1.02%), Starbucks (SBUX -0.10%), and Clorox (CLX 0.34%) stocks gives an investor an average dividend yield of 3.9% and exposure to the energy sector, the consumer discretionary sector, and the consumer staples sector. After a period of five years, an investor could expect a $10,000 investment to earn over $2,000 in passive dividend income. Here's what makes each dividend stock a great buy now.
Kinder Morgan isn't the same company it used to be
The majority of readers may be unfamiliar with Kinder Morgan, which is one of the largest pipeline operators and energy infrastructure companies in North America. But folks that have been investing in oil and gas for seven-plus years may remember when the company cut its dividend by 75%.
It's a rocky past that Kinder Morgan is trying to permanently put behind it -- and it's off to a good start. Since the cut, Kinder Morgan's dividend has more than doubled as it seeks to reward shareholders through a dividend supported by cash flow.
Kinder Morgan has transformed itself from an aggressive growth strategy to a defensive preservation strategy -- which is bad news for oil and gas bulls but great news for investors looking for a reliable dividend stock. In the past few years, Kinder Morgan has dramatically reduced its spending and paid off debt. Over 90% of its business is tied to stable take-or-pay and fee-based contracts that go years out, which protects against downside risk at the expense of limiting upside potential.
Kinder Morgan is unlikely to outperform other oil and gas stocks when prices are rising. But it's also much better positioned to earn strong cash flows in lower price environments as we saw in 2020. Given the stability of its businesses, Kinder Morgan is a worthy high-yield dividend stock worth considering now.
Throw some beans into your passive income stream
Starbucks often finds itself left out of dividend discussions due to outdated perceptions that the company is still a growth stock. It's not, and it hasn't been for years.
The Starbucks of today is a much more boring and stable business. Over the past five years, Starbucks has grown revenue at a compound annual growth rate (CAGR) of just 6.4%. But over that same period, it grew net income at a CAGR of 8.3% and its dividend at a CAGR of 14.4%.
Paying the dividend is a big part of Starbucks' strategy. So much so that the company released its most aggressive dividend and buyback program in company history. In the three-year period between fiscal 2022 and fiscal 2024, Starbucks plans to spend $20 billion on dividends and share repurchases. To put that number into perspective, consider that Starbucks spent a little over $2 billion in fiscal 2021 on dividends.
Investors looking for a strong and recognizable brand that is also an excellent dividend stock should look no further than Starbucks.
Clorox's dividend is safe
Clorox has had a rough go of it as of late, and these difficulties are reflected in the company's stock price. After blasting to a fresh all-time high in 2020, share prices of Clorox stock are now hovering around a three-year low and are down over 40% from that high.
Clorox's problems all boil down to shrinking profit margins in the face of higher inflation. The company is confident that its brands, such as Clorox, Glad trash bags, Burt's Bees, and Kingsford charcoal are leaders in their respective product categories. But higher costs, higher advertising spending, and supply chain challenges paint an uncertain picture of the quarters to come.
In addition to declining margins, Clorox's growth rate could be negative in fiscal 2022 as the company struggles to lap quarters that were less affected by inflation.
All told, Clorox is in for a multi-year period of weak growth. The silver lining is that all of this bad news is already public, so new investors considering Clorox now can buy the stock with all of these headwinds already digested by Wall Street.
The bull argument for Clorox would be that the company will recover over time, it's a consumer staple company that is resistant to a recession, and it is likely to continue paying and raising its dividend every year. Clorox is a Dividend Aristocrat, which is a member of the S&P 500 that has paid and raised its dividend for at least 25 consecutive years. With a dividend yield of 3.4%, Clorox produces a healthy passive income stream.
A hands-off approach
Kinder Morgan, Starbucks, and Clorox may not have anything in common as companies. But as stocks, all three could be great additions to a diversified portfolio. No matter if the stock market has rebounded and is off to the races -- or if the sell-off gets even worse from here -- investors can take solace knowing that these three companies will produce income without the need to sell stock.