Stocks have sold off sharply this year. However, if you look on the bright side, many are trading at much more attractive valuations. In an added bonus, stocks that pay dividends have seen their yields rise.
Because of that, there are some real bargains out there for passive income-seeking investors. Three dividend-paying stocks a few Fool.com contributors think look extremely attractive following this year's sell-off are 3M (MMM -1.13%), Energy Transfer (ET -0.09%), and Brookfield Infrastructure Partners (BIPC) (BIP 0.30%). Because of that, they could supply investors with lots of passive income in 2023 and beyond.
High yield for a reason
Reuben Gregg Brewer (3M): Wall Street is pricing in truly terrible news at diversified industrial giant 3M right now. In fact, the stock price has fallen so much that the dividend yield is near its highest levels in more than three decades. That suggests that 3M is on the bargain bin in a very big way, assuming that you don't mind collecting the generous 4.7% yield.
And, for what it's worth, the underlying business is doing reasonably well, all things considered. As an industrial, 3M's results are highly cyclical, and there's a real risk of a recession, not to mention the high levels of inflation that companies around the world are facing. But organic sales were up 2% year over year in the third quarter with operating margins in all of its business groups above 20%.
The bad news is that 3M will be dealing with legal (product liability) and environmental (site clean up) issues for years to come. And the ultimate cost of these headwinds is uncertain, but it could be very large, which is a big reason why investors are so negative on the stock. However, companies like Altria and Johnson & Johnson have survived similar headwinds in relative stride, so it seems reasonable that investment grade-rated 3M can do the same. If that's a risk you are willing to take (this isn't a stock for the faint of heart), this high-yield industrial giant could be a great end-of-year addition to your portfolio.
A big-time yield at a bottom-of-the-barrel valuation
Matt DiLallo (Energy Transfer): Midstream giant Energy Transfer offers investors a monster distribution that currently yields an eye-popping 8.9%. Yields that high usually mean one of two things: The payout is at a high risk of reduction, or the company trades at a dirt-cheap valuation. Energy Transfer is in the latter camp:
Data source: Energy Transfer Investor Relations Presentation.
As that chart shows, Energy Transfer trades at an enterprise value (EV) to earnings before interest, taxes, depreciation, and amortiztion (EBITDA) ratio of less than eight times. That's the second-lowest valuation in its peer group and well below the average.
There's really no reason for that bottom-of-the-barrel valuation. Energy Transfer generates lots of stable and steadily growing earnings and cash flow. Its adjusted EBITDA and distributable cash flow were up 20% year over year in the third quarter. That enabled the company to produce $760 million in excess cash after covering its big-time distribution. This amount funded its capital spending with room to spare, allowing Energy Transfer to continue paying down debt.
The master limited partnership (MLP) has made so much progress on its debt-reduction efforts that it's on track to reach its targeted leverage range of 4.0 to 4.5 times debt-to-EBITDA ratio by the end of this year. That progress has allowed Energy Transfer to return more cash to investors. The MLP has already boosted its distribution by 70% this year.
The company ultimately aims to return its payout to its former peak of $0.305 per unit each quarter. That implies the company will increase it by another 15%, which will likely come next year. As a result, investors will collect even more passive income from this bargained-price energy company in 2023, making Energy Transfer a great buy before 2022 ends.
Fearing a recession in 2023? This stock should still give you a dividend hike
Neha Chamaria (Brookfield Infrastructure Partners): Brookfield Infrastructure is a monster dividend stock, having increased its dividend every year since the company's formation in 2009 and growing it at a solid compound annual growth rate (CAGR) of 10% over the period, well supported by 15% CAGR in its funds from operations (FFO).
So far this year, Brookfield Infrastructure has generated record FFO quarter after quarter. Yet, the stock has tumbled as the market has focused more on what could happen to Brookfield Infrastructure if the economy were to slip into a recession versus what is happening with the company right now.
What the markets have failed to understand is that even in a high inflationary or a recessionary business environment, Brookfield Infrastructure should be able to generate steady FFO simply because almost 90% of it is contracted or regulated, and nearly 70% of its FFO is adjusted for inflation. That's because of the kind of assets the company owns and operates; most are in defensive sectors and industries like utilities, midstream energy, data infrastructure, and transportation like toll roads.
That also means even in a recession, Brookfield Infrastructure should still be able to increase its dividend payout. That prospect alone makes this stock so alluring right now. For that matter, Brookfield Infrastructure is targeting an annual dividend growth of 5% to 9%.
Brookfield Infrastructure has made some big investments this year, and it also periodically sells assets as they mature. This capital churning keeps bringing in cash that the company then invests in growth. It's a continuous cycle, one that'll likely keep pushing Brookfield Infrastructure to new heights. In between, you can enjoy regular and bigger dividends every year -- and a dividend yield of above 3% if you buy the stock now.
