The stock market has endured its worst first-half performance in 52 years. While it has been a brutal period for investors, there are some benefits to a big decline. One of those is that dividend yields have an inverse relationship to stock prices. So, as stock prices have fallen, yields have become more attractive.
Those higher yields might not last long, as some stocks could rebound rather quickly. Three stocks these Fool.com contributors believe are attractive for those seeking some income are Rockwell Automation (ROK 1.69%), Energy Transfer (ET -0.25%), and Clearway Energy (CWEN 1.26%) (CWEN.A 1.30%). Here's why investors might want to act fast on these passive income producers.
The need for automation isn't over
Reuben Gregg Brewer (Rockwell Automation): One of the important things that companies do during economic downturns is look for ways to save money. Rockwell Automation is focused on helping its customers cut costs by bringing robots and other automation tools into their business models. And yet, despite the long-term benefits the industrial company can offer customers, the stock is still down a whopping 40% or so in 2022.
That's not completely irrational. The stock rallied strongly after hitting a nadir during the 2020 pandemic-led bear market, so it was probably time for a breather. And if there is a recession, Rockwell Automation may find it harder to sell its products for a little while as companies look to retrench before they start finding ways to adjust for the future. In fact, the company lowered its full-year fiscal 2022 guidance when it reported fiscal second-quarter earnings in early May. However, a key factor in that change was actually the difficulty the company has been having getting parts, not a reduction in demand.
Notably, management reports that the company's backlog of work sits at record levels. Moreover, that backlog is generally for high-margin offerings, so it will be very profitable work once Rockwell gets the parts it needs to complete the sales. So, while the company is dealing with some headwinds, the long-term appeal seems to remain. Thus, this pullback may be overdone, noting that the dividend yield, at 2.25%, is back toward the high side of its range over the past decade or so.
Going on sale
Matt DiLallo (Energy Transfer): Units of Energy Transfer have tumbled nearly 25% in the past month. That has pushed the master limited partnership's (MLP) distribution yield up over 8.5%, an attractive level if you're seeking passive income.
The main issue weighing on the MLP is oil prices, which have plunged 20% over the past month on recession fears. That's causing concerns that oil demand could decline.
However, even if there's a recession and oil prices continue to fall, it won't have much impact on Energy Transfer's earnings. The MLP primarily generates fee-based income as oil and gas flow through its pipelines and related infrastructure. Volumes aren't likely to decline even if there's an economic downturn, because the global economy needs more supplies due to the impact Russia's invasion of Ukraine has had on global energy markets.
That catalyst is providing more opportunities for Energy Transfer to expand its operations. For example, the company recently secured another customer for its Lake Charles liquified natural gas (LNG) export facility, bringing that project one step closer to fruition. Meanwhile, Energy Transfer is working on several new natural gas pipeline projects and a potential expansion into the petrochemical sector. These investments could drive growth for years to come.
That could give Energy Transfer even more fuel to increase its high-yielding distribution. The MLP already intends to return its quarterly payment to its former peak, implying the potential for a more than 50% increase from the current level. It could surpass that in the future if the company secures additional expansion projects. With units now cheaper and the yield even higher, it looks like a good time to consider this passive income producer before the market realizes the recent sell-off doesn't make sense.
Get a 4% yield and up to an 8% annual dividend increase with this stock
Neha Chamaria (Clearway Energy): Clearway Energy is an oft-overlooked dividend stock as evidenced by its flattish performance so far this year. Yet investors seeking passive income from a company in a high-potential industry should seriously consider Clearway Energy stock for two simple reasons: It currently yields a good 4% and it's committed to dividend growth. In fact, Clearway Energy's aim is to provide investors "with stable and growing dividend income" backed by its large portfolio of contracted assets.
The company is equipped to meet that goal and expects to grow dividends every year by 5% to 8% through 2026. Clearway Energy is one of the largest renewable energy companies in the U.S. and has solid financials to back its growth plans. Despite reporting a loss in its first quarter, Clearway Energy expects to have $365 million in cash available for distribution for the full year, up almost 9% from 2021, thanks largely to the proceeds it received from the sale of its thermal assets earlier this year.
The sale left Clearway Energy with a lot of cash, most of which is being reinvested into growth. An example includes wind energy projects worth $255 million located in Texas, Nebraska, and Wyoming that the company has agreed to acquire this year. Yet, even after funding its growth projects, Clearway Energy will have enough money to dole out bigger dividends to shareholders, and I wouldn't be surprised if it increases dividends at the higher end of its 5%-to-8% guidance range. For income investors, that dividend growth is a compelling prospect to invest in.
