Investors operate on incentives. And when the risk-free 10-year Treasury rate is 3.4%, it's natural for investors to demand a little extra yield from their income stock portfolio.
Investing in equal parts of Stanley Black & Decker (SWK), ABB (ABBN.Y 1.09%), and Kinder Morgan (KMI -0.92%) produces a dividend yield of 4.4% and grants exposure to three excellent companies. Here's why each stock is a great buy for 2023 and beyond.
Tool up your portfolio for a better passive income stream with Stanley Black & Decker
Scott Levine (Stanley Black & Decker): With the S&P 500 plunging about 19% in 2022, many investors have found their investing enthusiasm dwindling over the past few months. Savvy investors, on the other hand, remain steadfastly committed to the market and are on the prowl for strong dividend stocks -- stocks like Stanley Black & Decker, a Dividend King with a forward dividend yield of 4.2%, that can infuse strong passive income streams into their portfolios.
Down about 60% over the past year, shares aren't powering as many investors' portfolios as they were during this time in 2022. But this isn't the company's first rodeo. Its history stretches back to 1843, meaning it's been around for the Civil War, two world wars, and numerous economic downturns. It seems that skeptics shouldn't be so quick to write off the company's prospects. Add to this the fact that the company has consistently raised its dividend for 55 years.
The most recent catalyst for the stock's fall was the company's third-quarter 2022 earnings report. While it beat top- and bottom-line estimates, the company reduced its 2022 diluted earnings-per-share guidance to $0.10 to $0.80 from an earlier range of $0.80 to $2.05 -- a downward revision that stems from supply chain challenges and high inventory levels leading to "planned production curtailments."
While there's a dour sentiment regarding the stock these days, experienced investors know that times like these provide advantageous buying opportunities. Management is committed to righting the ship. For one, the company expects to improve its supply chain, leading to $1.5 billion in savings by 2025 and an expected gross margin above 35%. For context, over the past 12 months, the company's gross margin is 27.6%.
Undeniably, the company has traveled a rocky road in 2022, and there may be some bumps in 2023 -- but all's not lost. The company's extensive history of rewarding shareholders and management's strategic initiative to improve the company's financial health suggest that this stock is a worthy consideration for 2023 and many years to come.
The engineering giant is starting to deliver on its promise
Lee Samaha (ABB): Along with much of the industrial sector, ABB's stock got hit in 2022 on fears of an economic slowdown and ongoing pressure on costs coming from the supply chain crisis. Throw in concerns over the European company's exposure to its home region (around a third of sales went to Europe in the third quarter) as a result of sanctions applied on energy from Russia, and industrial companies in Europe face soaring energy costs as a consequence.
While those fears are justified, it's important to note that ABB hasn't seen any significant signs of a slowdown. Indeed, excluding the impact of currency and divestitures, its orders were up a whopping 16% in the third quarter. Moreover, CEO Bjorn Rosengren affirmed that the company was on target for full-year operational earnings before interest, taxation, and amortization (EBITA) of 15% in 2022 -- a year ahead of target. The margin performance attests to the success of Rosengren's turnaround strategy at ABB. A once lumbering industrial giant, with a host of exciting businesses in areas such as robotics, motion control, automation, and electrification, is finally starting to realize its latent potential.
In recent years, Rosengren restructured the company's business model and aggressively divested, sold off, or spun off non-core businesses, including the recent spinoff of its turbocharger business, Accelleron, to focus ABB on electrification and automation -- two exciting trends in the economy. As such, ABB's long-term growth prospects look excellent, and its 2.8% dividend yield is compelling for investors who like to earn income while they wait for the growth potential in their stock to be realized.
The future is bright for Kinder Morgan
Daniel Foelber (Kinder Morgan): Kinder Morgan stock has gone sideways for the past five years and is down slightly over 1%. But during that time, investors earned a total return of over 30% thanks to the company's growing dividend. The stock currently yields 6.2% -- one of the highest yields of an S&P 500 stock. And Kinder Morgan's focus on the strength of its balance sheet and dividend raises indicate that the dividend is likely to keep going up from here.
Kinder Morgan is the ideal income stock because its earnings are stable. The pipeline and infrastructure company's business model is pretty simple -- invest in assets with a high chance of producing steady cash flows and then use those cash flows to support a growing dividend and invest in more assets.
Over the past few years, Kinder Morgan drastically cut its capital expenditures. But the company could be returning to growth as it leans into the need for more oil and gas infrastructure assets.
Kinder Morgan's pipeline network is integral to transporting natural gas, oil, and other commodities around the country. But the bigger growth opportunity is likely in the export of liquefied natural gas (LNG) to energy-dependent buyers overseas. Kinder Morgan is in an excellent position to benefit from the growth of LNG, as production regions need higher takeaway capacity from new pipelines to supply LNG export terminals.
For investors who believe the U.S. will continue to take a leading role as one of the world's largest and most reliable energy exporters, Kinder Morgan is a balanced investment that should continue to do well for decades.