With each passing week, the U.S. stock market is demonstrating that 2022 may not be like the rip-roaring years of 2019 through 2021. According to the Bureau of Labor Statistics, inflation is 8.5%, the highest reading in 40 years. U.S. 30-year mortgage interest rates just hit 5%, a 10-year high. New and existing home prices are at all-time highs. And everything from food costs to prices at the pump are on the rise as well.
In this kind of climate, fundamentals become more important than ever. Companies that have either been through past downturns or have the pricing power to offset the costs of inflation provide a crucial element of safety that unprofitable growth stocks do not have. In addition, dividend stocks can provide a steady passive income stream so that investors don't have to worry as much about short-term gyrations in the stock market.
Investing in equal parts of United Parcel Service (UPS 1.37%), NextEra Energy (NEE 0.99%), and Atlantica Sustainable Infrastructure (AY 0.63%)gives an investor an average dividend yield of 3.43% and exposure to the industrials sector, the regulated electric utility industry, and the renewable utility industry. After a period of six years, an investor could expect a $15,000 investment to earn over $3,000 in passive dividend income. Here's what makes each dividend stock a great buy now.
The transportation stock remains a good value option for dividend investors
Lee Samaha (UPS): The war in Ukraine isn't good for anybody, and it isn't good for international trade. The same can be said about outbreaks of COVID-19 in China. Unfortunately, both events are likely to have an impact on transportation stock UPS in 2022.
That said, long-term investors shouldn't be buying stocks based on temporary trading patterns. History suggests the global economy will work to fill in the gaps created by the lack of trade from Ukraine and Russia. Also, the supply chain bottlenecks created by the lockdowns in China are likely to ease when the restrictions relax.
The reality is that only a severe economic slowdown could threaten UPS's dividend of $6.08 per share. For reference, UPS generated $12.13 per share in earnings last year, and Wall Street analysts are currently forecasting $12.82 for 2022. Meanwhile, the company is tracking ahead of its 2023 targets -- in fact, management expects to hit most of them in 2022. Margins are expanding in the all-important U.S. domestic package segment. Furthermore, management is demonstrating an ability to significantly increase earnings and free cash flow generation even as it grows e-commerce deliveries.
There's a lot to like about UPS, and the stock's current 3.1% dividend yield makes it attractive for income-seeking investors.
A breath of fresh air for dividend-minded investors
The simplest explanation for why all three sectors are doing well is that they're resistant to inflation. Rising oil and gas prices are a cause of inflation, not a victim. Regulated electric utilities have stable cash flows and low growth, which make them resistant to recessions and inflation. And demand for consumer staples doesn't change too much based on the economic cycle.
However, investors looking for a long-term winner shouldn't pick just any utility right now. Rather, NextEra Energy stands out as the best of the bunch. NextEra plans to grow its adjusted earnings per share by 6% to 8% per year between 2023 and 2025. It's also a new member of the list of Dividend Aristocrats, which are S&P 500 components that have paid and raised their dividends for at least 25 consecutive years.
The real standout for NextEra is its wind and solar power generation -- which is the largest of any company in the world. Years of capital-intensive investments paired with long-term contracts have transformed NextEra's portfolio from majority fossil fuels to more natural gas and less coal, less nuclear, and a lot more wind and solar. NextEra Energy doesn't just produce power; it also operates transmissions and distribution networks, making it a vertically integrated utility.
Years of underinvestment have led to higher oil and gas prices. One solution is to increase production by developing fields and drilling new wells. Another is to use this opportunity to get even further away from fossil fuel dependence. For investors who believe the future of utilities is renewable energy, NextEra Energy is a safe stock you'll want to have in your corner.
A green way to grow your passive green stream
Scott Levine (Atlantica Yield): Investors on the prowl for a monster dividend stock to scare up a strong passive income stream probably aren't rushing to green energy stocks. For the most part, companies that are focused on solar and wind power -- among other clean energy sources -- are in the growth phases of their developments and not ready to return capital to shareholders. Offering investors a supercharged 5.2% forward dividend yield, Atlantica Yield, however, is no ordinary green energy stock.
Some green energy businesses specialize in manufacturing parts. Others focus on installing clean energy systems. Atlantica Yield falls into neither of these groups though. Instead, Atlantica Yield manages a portfolio of infrastructure assets. While the company includes natural gas assets and electric transmission lines in its portfolio, its green energy that accounts for the lion's share of the company's income. In 2021, for example, renewable energy assets accounted for 77% of the company's revenue.
Skeptics may question the company's high dividend, but taking a closer look at Atlantica Yield's business model should allay the concerns of those who are doubtful that the company can consistently reward shareholders. Primarily, Atlantica Yield inks long-term power purchase agreements (PPAs) with businesses for the power generated by the green energy assets. This provides the company with many years of steady, dependable cash flow. Of the projects in the company's portfolios, 45% of the PPAs have a term of 15 to 20 years, and 13% have terms of more than 20 years. Looking for a more concrete example of how the company is able to generate strong cash flow from these PPAs, circumspect investors should look at the company's recent performance. In 2021, Atlantica Yield grew its cash available for distribution (CAFD) by more than 12% compared to 2020. Management, moreover, expects to continue increasing its CAFD in the near future, targeting growth of 5% to 8% through 2025.