The stock market rebound continued on Wednesday after Wall Street acted favorably due to the Bureau of Labor Statistics' July Consumer Price Index reading. The Nasdaq Composite is now down less than 20% from its all-time high, while the S&P 500 is down just 12% from its all-time high.
While the rebound feels good, it's still important to focus on quality businesses that you understand. For income investors, the core objective is to find companies that can pay and raise their dividends over time.
Investing in equal parts of 3M (MMM 0.34%), Brookfield Renewable (BEPC 0.36%) (BEP 0.29%), and ABB (ABBN.Y 0.43%) gives an investor an average dividend yield of 3.4% and exposure to different industries within the industrial sector, as well as renewable energy. Here's what makes each dividend stock a great buy now.
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A Dividend King with a high yield
Daniel Foelber (3M): The Dow Jones Industrial Average is chock-full of impressive market-beating stocks like Apple and Microsoft, reliable dividend stocks like Procter & Gamble, and recognizable name brand companies like Nike. But it also hosts some big-time multi-year underperformers, with 3M topping the list as the worst of the worst. However, 3M stock has bounced 19% off its 52-week low in just one month. And there are signs its business could be turning the corner.
3M has three big problems right now. The first is that it has been making headlines for the wrong reasons, namely through its legal battle with military veterans over faulty combat earplugs that could cost the company over $1 billion. The second is that it is failing to pass along higher costs to its customers, resulting in declining margins and directly affecting 3M's short-term growth and profitability.
Third, 3M has failed to meaningfully grow its business over the long term. The 10-year revenue and net income chart says it all, as 3M's revenue is up less than 20% over the last 10 years, and net income is down.
MMM Revenue (TTM) data by YCharts
The long-term effect of 3M's restructuring remains to be seen. However, the strategic shift is already boosting its margins and has successfully reduced costs, which is a good sign that the worst may be over for it.
3M is by no means a fast grower. But it is an inexpensive stock -- trading at just 14.2 times the midpoint of its projected 2022 earnings of $10.30 to $10.80 per share. 3M is also a Dividend King that has paid and raised its dividend for 64 consecutive years. 3M stock has a dividend yield of 4%.
With two decades of past dividend growth, this clean energy powerhouse isn't slowing down
Scott Levine (Brookfield Renewable): Hydropower? Yes. How about wind power? Yes, that too. And also solar? You betcha. Brookfield Renewable is a clean energy powerhouse that specializes in operating a variety of renewable energy assets. In fact, it has more than 6,000 power-generating facilities that represent an installed capacity of 23 gigawatts (GW), making it one of the largest operators of renewable energy assets in the world.
The company, consequently, returns the cash it generates from its green power assets to its shareholders. And we're not talking about a pittance, either. Brookfield Renewable currently offers investors an attractive 3.2% forward dividend yield.
Over the past 20 years, Brookfield Renewable has demonstrated a consistent interest in rewarding shareholders with growing distributions. From 2001, when it provided $0.38 per unit, through 2022, when it expects to return $1.28 per unit to investors, Brookfield Renewable has logged a compound annual growth rate of 6% for its distributions.
And the company expects steadfast growth to continue in the years ahead. While management hasn't provided an end date for the growth profile of its dividend, it has stated a target of growing its distribution 5% to 9% annually.
Brookfield Renewable has been a reliable passive income engine for investors over the past two decades, and it seems well-positioned to continue in that role for years to come. During its recent second-quarter 2022 earnings presentation, the company reported that it has a 17-GW pipeline of projects that are under construction and advanced-stage.
And that was before the climate bill passing the Senate. Should it clear the House of Representatives and make it to President Biden's desk, renewable energy investments are expected to grow considerably -- something that could undoubtedly benefit Brookfield Renewable and buttress the belief that its distribution growth will continue.
The turnaround continues at ABB
Lee Samaha (ABB): This industrial giant has long been a puzzling investment proposition. On the one hand, it has an exciting collection of businesses with exposure to some highly attractive megatrends. Its electrification segment (including an electric vehicle charging stations, hardware, and services business) has exposure to the global trend toward electrification in the economy.
ABB's robotics and discrete automation segment has exposure to the trend toward increasing automation in the factory, and process automation and motion control are indispensable parts of the industrial economy.
On the other hand, the company has underperformed over the years. In the decade before the pandemic hit, the stock only rose a miserable 26%. However, since the start of 2020, it's outperformed many of its automation peers.
Data by YCharts.
The reason comes down to the turnaround strategy put in place by CEO Bjorn Rosengren when he took over in March 2020. Underperforming businesses have been sold, for example, the stake in its power grids to Hitachi and a mechanical power business to RBC Bearings. Meanwhile, ABB will spin off its turbocharging business (Accelleron) in due course, and plans to spin off its e-mobility business when market conditions are right.
Everything points to a business being restructured for growth in its core areas while it catches up with its peers' margin performance. It's a compelling value proposition, and investors will currently earn a 3% dividend yield while they wait for it to happen.
