Generating passive income is an excellent way to boost wealth. This way, the money accumulates while you are free to work on your career or sit on a beach enjoying the sunset.
If you're looking for passive income, which I imagine you are because you clicked on this article, then Clorox (CLX 0.24%) could be a solid choice. The company just increased its dividend payment again. Let's examine why passive income investors can consider Clorox stock for their portfolios.
A tailwind turned into a headwind is pinching Clorox's profits.
On July 12, Clorox announced it would increase its quarterly dividend payment to $1.18 per share. That means investors who buy Clorox stock will be getting quarterly payments totaling $4.72 per year. This isn't the first time Clorox has increased its dividend; from 2012 to 2021, the company has boosted its annual dividend per share from $2.40 to $4.44.
CLX Dividend Yield data by YCharts.
Those increases have steadily raised its dividend yield, which now stands at 3.15%. Clorox's dividend is appealing because a 10-year U.S. government bond yields less than 3%. But the company might have difficulty raising its dividend payment in the next few years at the same rate it did in the previous decade. Clorox's dividend payout ratio was over 100% most recently, which means the company paid more out in dividends than it generated in earnings.
That trend is unsustainable because eventually, the company will run out of savings to pay dividends and exhaust borrowing capacity. For Clorox to boost dividends, it needs to manage earnings growth. It thrived at the pandemic's onset as millions of folks increased their purchases of cleaning supplies. That trend has reversed as vaccinations against COVID-19 have accelerated and fear of the virus has diminished.
CLX Payout Ratio data by YCharts.
Clorox expects sales to fall by 2.5% at the midpoint this year. Moreover, the company has not been immune to widespread inflation, as its costs have risen even as sales are falling. As a result, management forecasts earnings per share to fall by 33% at the midpoint for fiscal year 2022.
Clorox's stock is not cheap.
CLX PE Ratio data by YCharts.
Interestingly, Clorox's stock is trading at a price-to-earnings ratio of about 40 and a price-to-free cash flow of 32.5, near the expensive side of its averages over the previous five years. Of course, all price ratios have a numerator (the stock price) and a denominator (whichever metric is evaluated). Clorox's rise in valuation is the result of a fall in its earnings and cash flow rather than a rise in the stock price. On the contrary, Clorox's stock is down 38% off its highs from the past five years.
In other words, passive-income investors would be paying a premium price with an attractive 3.15% dividend yield from Clorox's stock.
