With the S&P 500 up 12.1% year to date, it's easy to see why dividend stocks are out of favor. Even the 3.8% 10-year Treasury rate looks less attractive.
During times when the market is soaring to new heights, it's important to not let your emotions affect your investment decisions by rotating out of dividend stocks and into growth stocks. The principle cuts both ways, as it's also a bad idea to rotate out of growth stocks and into dividend stocks if they are selling off during a bear market.
But for investors who are regularly saving, deploying new capital toward quality dividend stocks could be a genius move. Here's why three Motley Fool contributors think Clearway Energy (CWEN 0.26%), FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA -0.21%), and Brookfield Infrastructure (BIPC -1.04%) (BIP -0.80%) stand out as top dividend stocks to buy now.
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Clearway Energy has never looked better
Daniel Foelber (Clearway Energy): If you're looking to generate passive income from renewable energy, then you've come to the right place. Clearway deploys capital toward energy projects and then generates income from those assets under power purchase agreements.
The company operates an 8-gigawatt (GW) portfolio consisting of wind, solar, and natural-gas-fired generation and has over 29 GW of projects in its development pipeline.
The investment thesis for Clearway is simple: As the world transitions to clean energy, it will be able to expand its project portfolio, earn more income, and support a growing dividend. It sees its payout growing by 5% to 8% per year through 2026.
Clearway is almost entirely focused on the U.S. market, making it the natural choice for investors who believe in the country's energy transition. According to the Environmental Protection Agency, the Inflation Reduction Act extends the Investment Tax Credit of 30% and Production Tax Credit through at least 2025, providing a boon for the U.S. renewable industry and a catalyst for Clearway.
But the stock is hovering around a 52-week low as rising interest rates make it more expensive to borrow capital while reducing the value of future cash flows from capital-intensive mega projects.
The stock looks like a great buy now. The sell-off has vaulted its dividend yield to 4.8%, and its ratio of price to free cash flow is now just 5.8 -- around a three-year low.
CWEN dividend yield, data by YCharts.
All told, Clearway provides a relatively safe way to invest in U.S. renewable energy that is ideal for those seeking passive income.
A simple way to gain exposure to sustained economic growth
Lee Samaha (FlexShares STOXX Global Broad Infrastructure Index Fund): The passing of the $1.2 trillion U.S. Infrastructure Investment and Jobs Act highlights the importance of maintaining and upgrading infrastructure in developed countries. It adds to the case for investing in global infrastructure.
It's long been known that leading developing countries like China, India, Brazil, and Indonesia must invest in infrastructure. Still, getting exposure to stocks active in these markets is not always easy.
As such, the FlexShares infrastructure exchange-traded fund (ETF) offers an excellent way to get broad exposure to ongoing infrastructure spending in the developed world. Around 57% of its holdings are in North America, with a further 33.5% in developed countries, leaving the remaining holdings in various countries, with the most significant percentage (1.46%) in Thailand.
Its holdings are relatively spread out, with energy (29.8%), communications (28%), transportation (24.2%), and utilities (8.3%) making up its core holdings. The diversification in countries and sectors helps ensure an ongoing income stream for the ETF, as more stable industries such as communications and utilities help balance out some of the more cyclical investments in transportation and energy.
The ETF's 2.2% dividend yield is sustainable, and investors can look forward to many years of income ahead.
Build a robust passive-income machine with Brookfield Infrastructure
Scott Levine (Brookfield Infrastructure): When the iron gets hot like this, it's time for investors to strike. That's the case with Brookfield Infrastructure right now and its enticing forward dividend yield of 4.2%. Between landmark legislation and an attractive price tag, several conditions have emerged that make Brookfield Infrastructure particularly compelling right now.
It might not appear in the headlines as much as it did in late 2021, but the bipartisan infrastructure deal is an important piece of legislation -- one of the greatest investments in America -- that can benefit Brookfield Infrastructure in the years to come. While the company has a global presence, the United States figures prominently, accounting for 44% of the company's funds from operations in 2022. The legislation aligns with many of the assets that the company operates in the U.S.
From the $66 billion in funding for rail improvements that the legislation provides to the $65 billion investment in clean energy transmission, there is a tremendous opportunity for Brookfield to benefit.
Income investors will find it particularly appealing considering its dedication to rewarding shareholders. From 2012 to 2022, Brookfield's distribution had a compound annual growth rate (CAGR) of 9%, consistent with its funds from operations, which had an 11% CAGR during the same period. And it's not as if the company expects to stop hiking the distribution anytime soon; management targets raising the distribution at 5% to 9% annually.
Further bolstering the buy case for Brookfield is the stock's attractive valuation. Units currently trade at 5.8 times operating cash flow, a discount to their five-year average cash flow multiple of 6.4.
