The S&P 500 index historically earns, on average, around 10% a year. But the year-to-year gains are usually much higher, or much lower, than 10%.
The volatility can be nerve-wracking if you're looking to make a financial plan. Dividend stocks can help make that task easier by providing a passive income stream without relying on stock prices to go up.
By investing $10,0000 in equal parts of Kinder Morgan (KMI -0.64%), 3M (MMM 0.46%), and Clearway Energy (CWEN 0.26%), an investor can expect to receive more than $5,000 in dividend income over the span of seven years. Here's what makes each high-yield dividend stock a great buy now.
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Kinder Morgan's dividend yield is eye-catching
Lee Samaha (Kinder Morgan): The energy infrastructure company's stock, and its dividend for that matter, is a battleground among investors. The bulls point to an improved balance sheet and the company's long-term fixed contracts that enable it to generate revenue on a take-or-pay basis. On the other hand, the bears point out that leading industry bodies, such as the International Energy Agency (IEA), have base case assumptions, including a long-term decline in demand for natural gas in North America from 2030 to 2050. It's a debate that will continue.
That said, I can't say with great certainty what the demand will be for natural gas over the long term, nor can anyone else, including the IEA. For example, the IEA's forecast is on a "stated policies" basis, meaning on the assumption of the stated political objectives in place now.
Given the substantial differences in political opinion on the future role of fossil fuels or even the use of natural gas as a long-term support for renewable energy (which tends to be intermittent), it's tough to predict where the "stated policies" will be after the next presidential election, let alone in 2050. As such, writing off the use of natural gas and, ultimately, demand for Kinder Morgan's pipelines and terminals would be a mistake. In conclusion, Kinder Morgan's earnings and dividend (current yield of 7%) may be much more sustainable than many think it will be.
This Dividend King is down but not out
Daniel Foelber (3M): At a 10-year low, there's no sugarcoating the fact that 3M stock has been a major disappointment. And as my colleague Lee points out, the issues could be short term and long term with growing grinding to a halt and little hope of a recovery.
3M is an industrial conglomerate that makes thousands of products for customers across its four segments -- safety and industrial, transportation and electronics, healthcare, and consumer products.
While there's little reason to be confident in 3M returning to growth anytime soon, the company does have a couple of major things going for it. The first is that the company doesn't necessarily have to grow in the near term to be a good value.
3M finds itself in a scenario that doesn't happen often. The stock is so beaten down that its existing earnings are actually impressive for the valuation of the company. And this level of earnings can easily support the existing dividend, which clocks in at a whopping 6.8%. 3M doesn't just have a high yield; it's also a Dividend King -- having paid and raised its dividend for 65 consecutive years.
The company is guiding for full-year adjusted earnings per share of $8.60 to $9.10, whereas the dividend is $6 per share. Assuming 3M achieves the midpoint of its guidance and based on a share price of $88.36 per share, the stock would have an adjusted price-to-earnings ratio of just 10.
It's worth mentioning that adjusted earnings are meant to show how the operations of the business are doing. 3M took a $10.3 billion pre-tax charge in the second quarter of 2023 regarding the settlement of its long-awaited forever chemicals issue. So the company's unadjusted earnings for the year will be negative, and it will have a negative price-to-earnings ratio.
Aside from this one-off payment, the valuation of 3M and its high dividend yield are reason enough to buy the dip in the stock. Although 3M is far from an imminent turnaround play, it does have a diversified portfolio and the makings of a company that could turn its business around. For patiently passive income-seeking investors, 3M stock just may be worth a look.
A robust pipeline inspires confidence that Clearway Energy will achieve its dividend growth target
Scott Levine (Clearway Energy): While investing in oil and gas stocks is a time-honored strategy for generating passive income, some renewable energy stocks like Clearway Energy have emerged as another viable option for energy-oriented investors. With a forward-yielding dividend of 5.3%, Clearway Energy -- and its portfolio of two renewable assets -- provides a lucrative way for investors to benefit from the growing adoption of solar and wind power.
Although some skeptics may question the sustainability of Clearway Energy's high-yield dividend, a quick peek at Clearway Energy's financials reveals that the company is well positioned to return such a generous amount of capital to shareholders. Thanks to its business model, which includes inking long-term power purchase agreements with customers, Clearway Energy generates consistent cash flows. This provides management with clear insight into future finances, affording it the ability to deftly manage how much it can pay in dividends and how it can allocate capital for acquisitions.
CWEN Dividend Per Share (Annual) data by YCharts.
Moreover, Clearway Energy has shown the ability to adequately fund its dividend from its free cash flow generation, further allaying the concerns of skeptics.
Looking ahead, management is targeting annual dividend growth of 5% to 8% through 2026. Taken in concert with the fact that Clearway Energy has a pipeline of assets totaling more than 30 gigawatts, and it seems like the company's dividend growth forecast could be an attainable goal.
