Market volatility is back. The Nasdaq Composite fell nearly 6% last week, but the S&P 500 was only down 2.3% and the Dow Jones Industrial Average (DJIA) fell 1.1%. Investors continue to flock to safe stocks that should do OK even if inflation continues to rise and economic growth slows.
Although no business is completely immune from an economic slowdown or a recession, there are certain companies that have either been through tough times before or have impeccable long-term growth prospects that make them worth holding.
Investing in equal parts of Brookfield Renewable (BEPC 1.79%) (BEP 1.19%), 3M (MMM -0.46%), and Watsco (WSO 2.86%) gives an investor a dividend yield of 3.4% and exposure to the renewable energy industry and virtually every industry in the industrial sector. Here's what makes each dividend stock a great buy now.
A bright idea for how to get paid to do nothing
Scott Levine (Brookfield Renewable): If you're looking to supercharge your passive income stream, you're not alone. While taking on side gigs is one way to supplement income that many people are turning to nowadays, generating a strong passive income stream is another path to increasing wealth that investors are choosing. One lucrative way to travel down that path is to pick up shares of Brookfield Renewable, a leader in renewable energy whose stock currently offers a compelling 3.1% forward yield.
Brookfield Renewable is a powerhouse in the clean energy industry. The company operates a portfolio of 21 gigawatts (GW) of various green energy assets -- located across four continents -- including solar, wind, and hydroelectric. And that portfolio, presumably, will be growing significantly as the company brings 62 GW of projects in development through its pipeline.
How does the company's robust portfolio benefit dividend-hungry investors? Brookfield Renewable's business model depends on the company signing long-term power purchase agreements with customers who purchase the generated power, providing the company with steady cash flow. In December, for example, the company inked a 40-year power purchase agreement for a hydroelectric asset located in Quebec that will provide the company with $20 million annually.
With good insight into future cash flows, Brookfield Renewable intends to continue rewarding shareholders. Management has identified an annual dividend growth target of 5% to 9% -- a target that seems quite reasonable based on its prior performance. From 2013 through 2022, Brookfield Renewable has increasingly rewarded shareholders, hiking the dividend at a compound annual growth rate of 6%. Circumspect investors need not fret that the planned dividend raises will come at the sacrifice of the company's financial health, since management also projects that funds from operations per unit will grow at 10% from 2021 through 2026, sufficiently covering the targeted dividend growth.
It's time to be greedy when others are fearful and consider 3M stock
Daniel Foelber (3M): Dividend investors often find themselves at a crossroads between a higher yield and more risk, or a lower yield and more safety. For example, the highest-yielding stocks in the DJIA aren't the well-known names Coco-Cola or Procter & Gamble, but rather, are companies like International Business Machines, Dow Inc, Walgreens Boots Alliance, Verizon Communications, and 3M. Each of those five stocks has a dividend yield of 4% or higher. But 3M is the only DJIA component that has both a high yield and is a Dividend King -- having just raised its dividend for the 64th consecutive year.
The streak is impressive. But 3M has been in the hot seat as of late for its borderline negligible dividend raises that do little more than allow it to retain its regal status as a Dividend King, not to mention its weak top- and bottom-line growth rate. 3M needs to prove to investors that it has a better handle on its cost structure and can return to growth after it completes its restructuring. Understandably, the company has vastly underperformed the broader stock market and been one of the worst performers in the DJIA for years. However, the investment thesis for 3M isn't based on how the stock has performed in the past, but rather, whether or not it's a good buy now.
Given 3M's 4% dividend yield and inexpensive valuation from a price-to-earnings (P/E), price-to-free cash flow, and enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) standpoint, 3M looks like one of the better value stocks to consider now. Its P/E ratio is below 15, the lowest it has been in nearly a decade. 3M generated $5.85 billion in free cash flow in 2021 and only paid $3.4 billion in dividends, a sign that it has plenty of extra cash to fund future raises and won't need to use debt to support the dividend.
3M's attempts to boost its margins and return to an acceptable growth rate have been choppy as the company has missed earnings forecasts and slashed forward guidance too many times over the last few years. Given investor sentiment is so low right now, it wouldn't take much for 3M to surprise investors. The 4% dividend yield and bargain bin valuation are a nice incentive for patient investors to give 3M the benefit of the doubt.
Watsco remains attractive for investors looking for secure income
Lee Samaha (Watsco): In February, I noted that heating, ventilation, and air conditioning company Watsco's current 3% dividend yield made it an attractive stock for investors. Over the last two months, the stock is up 13%. But Watsco also increased its dividend by 13% to $8.80 per share per year. Therefore, the net result is that the dividend yield is still 3%.
You will find higher-yielding stocks on the market, but the point is that Watsco provides a good yield and a high level of confidence in the security of the dividend and the company's potential to grow it. Wall Street analysts expect Watsco to generate nearly $12 in earnings per share in 2022, more than enough to cover the $8.80 annual dividend, and the company's growth prospects look good.
As a reminder, Watsco is a leading player in a highly fragmented market and has growth opportunities merely by continuing its strategy of consolidating the market by acquiring small distributors. It enables Watsco to expand its geographic coverage while increasing profits by passing on the benefits of its size and scale to the acquired companies.
Moreover, with 65%-70% of its revenue from the replacement market and nearly all its sales from North America (with a heavy focus on the residential market), Watsco offers investors a secure stream of earnings and dividends. So don't be surprised if Watsco churns out profits and dividend hikes for investors for many years.