Dividend stocks aren't just sources of short-term passive income. If you pick the right ones, they can be some of the best investments to grow your wealth manyfold over time.
With another year drawing to a close, now would be an excellent time to draw up a list of high-conviction, high-yielding stocks that you could buy to generate steady streams of passive income for yourself for years to come. Here are three top-notch dividend stocks you should consider buying hand over fist in December.
Is this energy giant about to hike its dividend?
Chevron (CVX 0.75%) is one of the world's largest oil and natural gas producers, and it can make a lot of profits in a high oil price environment. At the same time, its financial fortitude means Chevron can still make money even if oil prices fall, and keep paying out growing dividends year after year.
Chevron, in fact, says its dividend is its "number one financial priority," and there's evidence to back that claim. It's one of only two oil and natural gas companies that's also a Dividend Aristocrat -- meaning it has at least a 25-year streak of annual payout increases. (The other is ExxonMobil.) Chevron has increased its dividend for 35 consecutive years, even during the last couple of years or so when several energy companies slashed their payouts amid the COVID-19 pandemic and the oil price rout of 2020.
Chevron's annual payout has almost doubled since 2010, and the stock's yield of 3.2% at the current share price is also almost twice the average yield of the S&P 500 index. That's a pretty competitive yield when interest rates are rising, and more importantly, Chevron's dividend is well-supported by its growing cash flows.
Companies can only grow their dividends sustainably when their cash flows are growing too. Chevron's free cash flow more than doubled to $29 billion in the first nine months of 2022, and the cash and cash equivalents it had on its books jumped by 170% to $15 billion between Dec. 31, 2021, and Sept. 30, 2022.
With Chevron on track to generate record free cash flow this year, a good dividend hike in 2023 is almost assured. It last increased its payout by 6% in January.
A green energy player that's committed to paying shareholders more
Another stock from an entirely different part of the energy sector that you may want to seriously consider buying now is Clearway Energy (CWEN 1.12%) (CWEN.A 1.50%). With its focus on wind and solar energy, it's one of the largest clean energy producers in the U.S. with an existing generating capacity of roughly 5 gigawatts.
Renewable energy has massive potential as countries around the world are pursuing efforts to decarbonize and stem the tide of climate change. Clearway Energy acquires and invests in large-scale renewable energy assets, and sells power to utilities under long-term, fixed-price contracts. Since its contracted cash flows are stable and predictable, Clearway Energy has made dividend growth a crucial part of its business strategy. To that end, it doesn't shy away from distributing a significant portion of its cash flow through dividends and relying on external funding sources for growth where required.
Thanks to its dividends, an investment in Clearway Energy made about seven years ago would have more than doubled in value today.
So where does Clearway Energy stock go from here? That there is plenty of upside seems beyond doubt considering that its parent, Clearway Group, has renewable energy projects worth 6.8 gigawatts in the later stages of development that could come online between 2023 and 2025. There could be an almost 30% drop-down opportunity from that pipeline for Clearway Energy, and a lot more as its parent grows. The opportunities now seem bigger after energy giant Total Energies agreed this spring to buy a 50% stake in Clearway Group.
Clearway Energy expects to grow its cash available for distribution by almost 17% in 2023. That should comfortably cover its dividends even if the company hikes its payout. This year, management boosted the dividend by a solid 8%, and said it was confident that it would be able to hike it by 5% to 8% annually through 2026. With Clearway Energy also yielding 4% at the current share price, investors have an opportunity here to buy a solid dividend payer in a segment of the energy industry that could grow exponentially in the coming years.
A dividend gem you can't afford to ignore
Brookfield Infrastructure (BIPC 0.84%) (BIP 2.82%) can be overlooked by income investors, but it's a gem of a dividend stock.
With fears of a recession looming large, it's understandable why some investors would be wary of infrastructure stocks. Yet Brookfield Infrastructure is a different kind of infrastructure player. It owns and operates large-scale infrastructure assets, but most of them are highly regulated or produce contracted revenues. Examples include utilities, midstream energy assets such as pipelines, transportation like railroads and toll roads, and data infrastructure such as telecom towers and data centers. That simply means that Brookfield can generate steady, predictable cash flows even during challenging economic times -- cash flows that it can pass on to its shareholders.
So far, its strategy of acquiring assets, operating them profitably, and then reselling them once they are mature so that it can reinvest those funds opportunistically elsewhere has paid off handsomely for the company and shareholders alike.
Brookfield Infrastructure has grown rapidly this year. In the first nine months of 2022, its funds from operations grew by 22% year over year, and the company increased its dividend by 6% in the third quarter.
But something remarkable happened in the third quarter that most investors probably didn't hear about.
Although Brookfield Infrastructure increased its dividend in Q3, its payout ratio fell from 75% to 67% in the quarter. That means even though management hiked the payout, it invested the bulk of its higher earnings into more growth. Eventually, all of those investments should power Brookfield Infrastructure's dividends even higher. As it is, management is targeting annual dividend increases in the 5% to 9% range over the long term.
So what you have here is a company that is growing cash flows steadily, could benefit exponentially from rising global infrastructure spending, and could easily generate double-digit percentage returns annually through its dividends for shareholders. Yet, shares of Brookfield Infrastructure are trading down by more than 12% year to date as of this writing, and yielding more than 3%. That combination makes it a no-brainer dividend stock to buy this month.
