Red-hot inflation. Declining asset values. The bear market is here. And no one knows how long it will last. Market downturns can be brutal. But they can also create life-changing wealth for patient investors.
Investing in equal parts of Raytheon Technologies (RTX 0.84%), 3M (MMM 0.86%), and Clearway Energy (CWEN 1.29%) gives you an average dividend yield of 3.8% and exposure to the defense industry, the industrial sector, consumer products, healthcare, automation and robotics, and renewable energy. After a period of three years, you could expect a $10,000 investment to earn at least $1,000 in passive dividend income. Here's what makes each dividend stock a great buy now.
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Raytheon Technologies can continue to outperform
Lee Samaha (Raytheon Technologies): This aerospace and defense giant is a rare beast -- one of the few companies whose stock is up in 2022. The main reason probably comes down to a better outlook for its defense businesses. Unfortunate as the circumstances behind it are, investors are pricing in a step-up in global defense spending due to the conflict in Ukraine. However, it would be a mistake to underestimate the positive trends in Raytheon's aerospace businesses too.
The commercial aerospace industry is recovering from the travel restrictions imposed during the lockdowns, providing a multi-year growth opportunity for suppliers. As such, it's the side of the business set to contribute the most to profit growth in 2022.
In addition, its long-term prospects are excellent. In particular, I would draw attention to Pratt & Whitney's geared turbofan (GTF) engine available on the Airbus 320 NEO family of aircraft, among others. Given that the Airbus A320 NEO is the workhorse of the skies, and aircraft engines tend to generate at least a couple of decades of lucrative aftermarket and service revenue, the GTF program is likely to generate earnings growth for many years to come as the engines mature.
Meanwhile, Raytheon's other commercial aerospace-focused business, Collins Aerospace, offers such a wide range of products (from avionics to seating, cabins, structures, and landing gear) that it will inevitably participate in the recovery. Putting it all together, Raytheon's current dividend of $2.20 (yielding 2.5%) is likely to be a lot higher in a decade. That would be good news for investors.
3M stock is a well-rounded source of passive income
Daniel Foelber (3M): Aside from a brief drop during the spring 2020 market sell-off, 3M stock reached an eight-year low on Friday and is now down 50% from its all-time high. The outlook for 3M and its competitors is riddled with headwinds, such as rising raw material and labor costs, ongoing supply chain issues, and a slowdown in the broader economy.
As Lee pointed out in a previous article, 3M is likely to cut its already weak guidance in the quarters to come, which could result in negative revenue and earnings growth. Not only is the short-term outlook bad, but 3M has faced year after year of low growth and minimal dividend raises to sustain its status as a Dividend King -- an S&P 500 component that has paid and raised its dividend for at least 50 consecutive years.
3M is a bit of a mixed bag right now. Its management continues to let down investors. But no other company is quite like 3M -- which operates in the healthcare, consumer products, transportation and electronics, and safety and industrial industries. 3M has been a market laggard and the worst Dow stock to own over the last eight years. But it also has a 4.6% dividend yield. This discussion isn't about if 3M was a buy a few years ago, but whether or not it's worth considering this downbeat stock now.
One of the most compelling qualities of 3M is that it is ridiculously cheap. 3M has a price-to-earnings (P/E) ratio of 13.5. Its forward P/E ratio based on its current guidance of $10.75 to $11.25 in 2022 earnings per share is around 11.5 or 12. Even if 3M cuts its guidance substantially, it's still likely to have a P/E ratio below 15.
It's easy to look at a company like 3M and pass because it has too many issues. But at a certain point, a company that has been around for 120 years and survived several recessions deserves a second look. Throw in a bargain bin valuation and a very high dividend yield, and you have a generous passive income source paired with a nice turnaround play.
Let the sun and wind power your passive income production
Scott Levine (Clearway Energy): With trips to the supermarket and gas station -- among many other businesses -- resulting in higher price tags, investors are eager to boost their cash flow to provide some relief. Simply growing their passive income in this environment, however, isn't enough; they want peace of mind as well. For these folks, Clearway Energy, a renewable energy powerhouse with a 4.3% forward dividend yield, offers a great opportunity.
Operating a portfolio of various clean energy assets (including solar, energy storage, and wind) Clearway Energy is one of the largest providers of renewable energy in the U.S. The company's allure for circumspect investors rests on its powerful business model. Clearway Energy inks long-term power purchase agreements with customers, resulting in the company generating steady, multi-year cash flows. With this clear foresight into its future finances, management can plan for future capital allocation, including dividend payments.
Another reason Clearway Energy represents a reliable dividend play is its recent deal with TotalEnergies. As a result of the transaction, Clearway Energy has greatly increased its runway to growth as it will have access to those renewable energy assets that TotalEnergies has developed and is looking to offload.
CWEN Dividend Per Share (Annual) data by YCharts.
Turning to the financials, investors will find that the strong cash flow Clearway Energy generates -- prior to its deal with TotalEnergies -- suggests that it's a reliable dividend play for income investors. Since it started paying a dividend in 2016, Clearway Energy has consistently generated ample free cash flow to cover its distribution to shareholders, suggesting that management is taking a conservative approach to rewarding shareholders.
