2022 is on track to be the worst year for the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average since 2008. So it's OK if your investment portfolio is down big.
One of the best lessons from 2022, especially for new investors, is understanding the consequences of investing in companies you don't understand and that don't match your personal risk tolerance.
Brookfield Infrastructure (BIP 0.36%) (BIPC 1.21%), Deere & Company (DE -0.60%), and United Parcel Service (UPS 2.42%) are three reliable dividend stocks that are relatively easy to understand and are a good fit for investors who have a moderate risk tolerance. Here's what makes each stock a great buy now.
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Build a better passive income stream with Brookfield
Scott Levine (Brookfield Infrastructure): With the S&P 500 down 17% year to date, investors of all ilks -- from newbies to veterans -- are likely seeing a lot of red when checking the performance of their holdings. Disconcerting as this may be, history repeatedly proves that the market will recover. In the meantime, however, investors can pick up leading dividend stocks like Brookfield Infrastructure and its forward yield of 3.8% to generate passive income while waiting for the market to bounce back.
While North America accounts for the lion's share of its funds from operations -- about 44% over the past 12 months -- Brookfield Infrastructure has a notable presence in other locales around the globe, including South America, Europe, and Asia Pacific. This helps to mitigate the risk of a downturn in any one geography. Similarly, Brookfield Infrastructure owns and operates a variety of assets: utilities, rail operations, toll roads, gas pipelines, and data centers.
For over a decade, management has deftly added assets to its portfolio while divesting mature assets. This feat is evident in the company successfully growing funds from operations (FFO) as well as hiking its distribution higher. At the end of the third quarter of 2022, Brookfield Infrastructure, for example, had grown FFO per unit at a 16% compound annual growth rate (CAGR) and its distribution per unit at a 10% CAGR. Investors can expect comparable increases to the distribution in the future; management has targeted a 5% to 9% annual raise to its distribution moving forward.
Conservative investors may question at what cost Brookfield Infrastructure is willing to reward shareholders. A quick look at the company's balance sheet, however, should allay this concern. The company maintains an investment-grade balance sheet rated BBB+ by S&P Global Ratings.
With the stock trading at 6.4 times operating cash flow, a discount to its five-year average cash flow multiple of 6.8, now seems like a great time for investors to click the buy button on Brookfield Infrastructure.
Deere just had its best year ever
Daniel Foelber (Deere): Don't let Deere's 1% dividend yield fool you. The company is in its best shape in history and is putting up record results in a business climate in which growth is rare.
Deere is benefiting from strength in the agriculture and construction industries, partially thanks to years of limited customer spending and today's relatively high commodity prices.
Although Deere is a cyclical company, it remains somewhat insulated from the broader economy. No cycle is the same. And this one is driven by inflation and rising interest rates, heavily impacting the consumer, and in turn, the technology and consumer discretionary sectors. Energy and industrials, although cyclical, have been successful in passing along costs to consumers. Deere is one of the best at this. It demonstrated pricing power for all of fiscal 2022, which greatly enhances its ability to offset inflation.
A great metric to look at when gauging profitability during this inflationary time is the operating margin. Deere capped off fiscal 2022 with a 17.4% operating margin -- the highest in the past 35 years. What makes this accomplishment stand out is that so many companies are seeing growth decelerate and margins compress. Deere is doing the exact opposite.
For fiscal 2022, Deere guided for $7 billion to $7.2 billion in net income. It reported $7.13 billion in fiscal 2022 income -- hitting its goal -- and is guiding for a 12% to 19% increase in net income for fiscal 2023.
Deere believes in the Industrial Internet of Things and has been ramping up investments in automation and artificial intelligence to boost crop yield and reduce farm labor costs. The unveiling of its autonomous tractor in January 2022 was a big leap forward. The company still has a way to go. But if there is any company that is going to push agriculture into the next stage of innovation, it's Deere.
Trading at a forward price to earnings ratio of just 16.1, Deere isn't overpriced despite its outperformance relative to the S&P 500.
UPS will emerge stronger from a recession
Lee Samaha (UPS): It hasn't been a positive year for the stock market, and it hasn't been an excellent year for UPS stock either -- the stock is down nearly 15% on the year at the time of writing. There's little UPS can do about a weakening macroeconomic environment. However, the company can take action to improve its underlying business, and that's precisely what management continued to do in 2022.
I use the word "continued" to reflect the company's ongoing transformation that began in 2018, primarily focused on its core U.S. domestic package segment. As part of the strategy, management has focused on growing key end markets, including small and medium-sized businesses, healthcare and life sciences logistics, and business-to-business e-commerce deliveries. Meanwhile, it has displayed a willingness to forgo some less profitable business-to-business deliveries. The result is that the segment's revenue, profit margin, and profits have grown impressively even as volumes have declined.
That said, UPS is still heavily exposed to the economy, and there's little the company can do about a weakening macroeconomic environment. In particular, its international package segment faces a difficult period.
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Still, the company's operational improvements mean it's well-placed to expand margins and increase profits for many years to come once it can muddle through a difficult period. Moreover, the company's dividend (current yield of 3.3%) is well covered by its earnings and free cash flow.
All told, its earnings quality is improving, and UPS will emerge stronger from this weaker economic environment.
