Sitting in traffic to get to the office on time, keeping your work from home space clear and clean, performing our actual work duties -- few people will argue that work seems like, well, a lot of work. Fortunately, dividend stocks enable investors to get paid for doing nothing.
But newbie investors may feel like trying to identify tickers to build passive income streams sounds like hard work in and of itself. Think again. Let's consider why 3M (MMM 0.86%), Brookfield Renewable Corporation (BEPC 0.81%), Essential Utilities (WTRG 0.80%), Phillips 66 (PSX 0.91%), and Realty Income (O 1.94%) are smart stocks to form the foundation of your dividend stocks basket.
1. 3M
A wise choice for inexperienced investors, 3M, an industrials stalwart in an elite group of stocks: the Dividend Kings. Not only do you receive the reassurance that management has the wherewithal to maintain (and raise) its distribution to shareholders -- it's been doing it for 64 consecutive years -- but you receive an attractive 4.6% forward yield. While the company's track record of dividend raises isn't a guarantee that the trend will continue in the future, it does provide some confidence that management will succeed in deftly navigating the challenging macro environment looming on the horizon
Besides its position as a leading provider of products and solutions for various industries, the company's financials illustrate why it's a good choice. Over the past 10 years, 3M has averaged a payout ratio of 54%, suggesting that management isn't willing to jeopardize the company's financial health to make investors happy.
2. Brookfield Renewable Corporation
From a titan in the industrials sector to one in renewable energy, Brookfield Renewable is a savvy selection to include in a new basket of dividend stocks. Clean energy solutions are currently having their day in the sun, and the growing adoption of solar and wind power (among other sources) is bound to continue. According to the International Energy Association, for example, global renewable energy capacity is projected to rise 60% from 2020 to 2026.
Operating a global portfolio of renewable energy assets, Brookfield Renewable secures multi-year agreements with customers to purchase power from its assets, securing long-term cash flows. The company's portfolio currently includes 21 gigawatts (GW) of operating capacity, while it has 69 GW of projects in the pipeline. This provides some clarity for investors who wonder about how the company will be able to grow its dividend, which currently has a forward yield of 3.5%, in the coming years. In addition, the company's investment-grade balance sheet suggests that it's in sound financial health, which provides additional reassurance that the company is well-positioned to continue with its dividend payments.
3. Essential Utilities
Like Brookfield Renewable, Essential Utilities is another utility that warrants attention. Providing water, wastewater, and natural gas service to more than 5 million customers, Essential Utilities deals primarily in regulated markets -- so while it can't raise prices arbitrarily, it does have good foresight into future cash flows. This affords management the ability to plan well for future capital expenditures, including infrastructure upgrades as well as dividend payments. In addition, because the company relies on regulated markets for the lion's share of its revenue -- 98% in 2021, for example -- investors need not worry that an economic downturn will jeopardize the company's financials as acutely as those operating in other industries.
Shares of Essential Utilities currently offer investors a 2.6% forward yield. While the stock doesn't offer a mouth-wateringly high yield, it's important for new dividend investors to recognize that there's more to income investing than merely gobbling up high-yield stocks. Developing a well-diversified portfolio is a premier way to mitigate risk. While it's wise to make room for more aggressive stock choices, buttressing one's holdings with a conservative utility stock like Essential Utilities is also a valuable strategy.
4. Phillips 66
Besides the renewable energy option, Phillips 66 is also worth attention from newbie dividend investors. In fact, Phillips 66 is a worthwhile option for experienced dividend investors as well. With a history stretching back 150 years, Phillips 66 is a well-diversified energy company that has extensive midstream and downstream assets. Located in the United States and Europe, Phillips 66 has 12 refineries that have a daily refining capacity of 2.2 million barrels of crude oil; in addition, the company provides gasoline, diesel, and aviation fuel at more than 7,000 independently owned locations.
Today, investors who pick up shares of Phillips 66 can power their passive income streams with a potent 4.3% yield. With energy prices high these days, Phillips 66 stands to prosper; but even when energy prices dip, the company should have the fortitude to remain in a strong financial position and sustain its dividend. Consider its performance over the past 10 years -- a period of both high and low energy prices during which it has returned, on average, $2.49 per share annually via the dividend. During the same time, the company generated average annual free cash flow of $3.23 per share.
5. Realty Income
While its history of returning capital to shareholders isn't as long as 3M's, Realty Income's track record is certainly noble. Raising its distribution for 27 consecutive years, Realty Income is one of the distinguished stocks that belongs to the group known as Dividend Aristocrats. Unlike many of its peers, however, Realty Income issues its dividends on a monthly basis, helping long-term investors to compound their returns even quicker than with those stocks that pay dividends on a quarterly basis. Since the company debuted on the public markets in 1994, Realty Income has raised its dividend 115 times, contributing to its 4.4% compound annual dividend growth rate.
Structured as a real estate investment trust, Realty Income is required to return 90% (at minimum) of its taxable income to shareholders as dividends, so dealing in dividends is central to the company's identity. In fact, Realty Income characterizes itself as The Monthly Dividend Company.
Diversification is a good place to start
For investors looking to get started with dividend investing, it's important to mix things up a little in order to reduce the amount of risk. 3M, for example, is an industrials heavyweight that offers an attractive dividend yield backed up by a lengthy history of increasing dividend raises. Brookfield Renewable and Phillips 66, on the other hand, represent two diverse energy options that fall toward the more conservative end of the risk spectrum. Meanwhile, Essential Utilities and Realty Income provide additional ways to diversify passive income streams for new investors.
