There's a well-known principle in retirement planning called the 4% rule. At its core, the strategy is focused on withdrawing 4% of your savings starting the first year in retirement. One way to supplement income in retirement and make sure that withdrawals don't deplete the nest egg too quickly is to invest in dividend stocks.

Dividend stocks generate income without the need to sell assets. But as of June, the S&P 500 dividend yield was only 1.7%. In contrast, Dow Inc. (DOW 0.70%), LyondellBasell Industries (LYB 1.00%), and Kinder Morgan (KMI -0.06%) each yield above 6%.

The drawback of these three companies is that they generally grow earnings at a slower rate than the S&P 500. However, risk-averse investors who are more focused on capital preservation than capital appreciation may prefer a higher yield and lower growth. Here's why Dow, LyondellBasell, and Kinder Morgan are three excellent income stocks worth buying now.

A chemical plant and associated infrastructure at dusk.

Image source: Getty Images.

A chemical company that is bursting with passive income potential

Daniel Foelber (Dow): Commodity chemical companies like Dow are capital-intensive and cyclical. Plus, they only achieve low to moderate earnings growth over the long term.

On the surface, the investment thesis may not look compelling. But Dow stock has a lot going for it -- especially for risk-averse investors looking for a sizable source of passive income.

Dow is an industry-leading manufacturer of materials, chemicals, plastics, and other products that are used across dozens of industries. The majority of its revenue and sales come from its packaging and specialty plastics segment. Industrial intermediates and infrastructure made up about 23% of its earnings before interest and taxes (EBIT) for the first six months of the year, while its third segment, performance materials and coatings, made up 24% of EBIT. 

Dow's business is cyclical for a couple of reasons. For starters, oil and natural gas prices provide the feedstocks used to make Dow's end products. When oil and natural gas prices are high, Dow has higher expenses. Additionally, many of the products Dow makes tend to experience higher demand when the economy is doing well. As an example, submarkets of Dow's packaging and specialty plastics segment include packaging for food products, bottles and drums for industrial applications, medical packaging, coatings, lids, and bags.

Relatively high oil and gas prices paired with declining industrial, commercial, and consumer demand is bad news for Dow's short-term business. But nothing about the long-term outlook has changed. As populations increase and countries industrialize, Dow should experience growing demand. There's also an opportunity for Dow to grow its foothold in sustainable packaging and other environmentally friendly markets -- which the company outlined in its 2021 ESG report. 

Even if earnings fall, Dow stock should remain inexpensive. The company has a price-to-earnings (P/E) ratio of 5 and its dividend yield is 6.1%. With its industry leadership, Dow is arguably the best high-yield Dow Jones dividend stock to buy now.

A value stock for brave investors only

Lee Samaha (LyondellBasell Industries): LyondellBasell is a major manufacturer of plastic resins and chemicals used by customers across various industries to make products. Its valuation metrics are striking. Trading on a P/E ratio of less than five times earnings, it sports a 6% plus dividend yield. As such, it will attract income-seeking investors. 

That said, analysts have recently issued a slew of downgrades for the stock over fears of ongoing high energy costs and the probability of a slowdown in economic growth impacting demand. There's no doubt that there's been a drop in the prices of critical chemicals like polypropylene and polyethylene (LyondellBasell is a significant producer of both), and there's no telling where energy prices are heading in light of the conflict in Ukraine. So it's an uncertain environment, and 2021 probably represents a medium-term peak in its earnings and cash flow. 

Still, the company has an excellent record of increasing its dividend and ensuring it's adequately covered.

LYB Dividend Per Share (TTM) Chart

Data by YCharts

Moreover, the fact that the stock is only down 12% this year suggests its share price is supported by its dividend. Contrast this with the 42% decline in stock in LyondellBasell's competitor, Celanese -- a stock Warren Buffett's Berkshire Hathaway has been buying this year. If Buffett is right about buying into the chemicals industry and LyondellBasell maintains its dividend, then investors can look forward to some capital appreciation as well as a hefty dividend.

Scare up some passive income with this monster midstream stock

Scott Levine (Kinder Morgan): Choosing investments that help generate passive income is always a sound strategy, but with the S&P 500 plunging about 21% year to date -- and market volatility showing no signs of slowing -- now seems like a particularly good time to take a look at companies that reward shareholders with dividends -- companies like Kinder Morgan. With a forward dividend yield of 6.3%, this energy infrastructure stock offers investors a great opportunity to power their portfolios with a passive income powerhouse.

Operating an extensive network of midstream assets, Kinder Morgan plays a critical role in the North American energy chain -- a role that is unlikely to taper off in importance anytime soon. The company proclaims itself as the operator of the largest natural gas transmission network in North America, as well as the largest independent transporter of refined products and the largest independent terminal operator.

Oftentimes with high-yield stocks like Kinder Morgan, conservative investors question whether companies are jeopardizing their financial well-being in order to satisfy shareholders with a hefty dividend. It's a valid concern, but in the case of Kinder Morgan, it seems that this isn't the case. Looking at the company's performance over the past five years, investors will find that the dividend is well covered by the company's free cash flow.

KMI Free Cash Flow Per Share (Annual) Chart

KMI Free Cash Flow Per Share (Annual) data by YCharts.

In addition to the company's strong cash flow generation, cautious investors should be encouraged by the company's conservative approach to leverage. During a recent investor presentation, management forecast that the company will have a ratio of net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of 4.3. Moreover, management has set a long-term ratio target of 4.5.