While dividend stocks can be a great way to generate passive income, they're riskier than fixed-income investments, like bonds and bank CDs. Companies don't have to pay dividends. That's why they are often among the first cuts when companies face financial trouble. Over a dozen companies have cut their payouts in 2023, including former dividend stalwarts Intel and VF Corp.
However, there are a lot of safe dividend stocks out there. Kinder Morgan (KMI -0.64%), Equinix (EQIX -0.91%), and Lockheed Martin (LMT -0.75%) are three super-safe dividend stocks because they generate contractually secured cash flow and have strong financial profiles. That makes them great options for those seeking to fortify their dividend income in 2024 and beyond.
Lots of fuel to pay dividends
Kinder Morgan offers investors a hefty dividend that currently yields 6.3%. That puts it among the top 5% highest yields in the S&P 500, where the average is 1.5%. While a high dividend yield is often a warning sign that a cut could be forthcoming, that's not a risk facing Kinder Morgan's payout.
The natural gas pipeline giant generates incredibly stable cash flow. It gets 61% of its earnings from take-or-pay contracts (meaning it gets paid even if customers don't use their contracted capacity) while hedging contracts lock in another 6% of its earnings.
Meanwhile, fee-based contracts supply 26% of the company's earnings (while these contracts have volume risk, it's paid the same fee regardless of commodity prices). That leaves only 7% of its cash flow exposed to commodity price and volume risk. Kinder Morgan's highly contracted cash flows give it lots of visibility into its earnings. It expects to generate $5 billion, or $2.21 per share, of cash flow in 2024.
Kinder Morgan will pay out a little over 50% of its stable cash flow in dividends next year. That enables it to retain substantial cash to fund expansion projects while maintaining a strong balance sheet.
The company currently expects its leverage ratio to end next year at around 3.8 times, well below its long-term target of 4.5 times. That gives it tremendous financial flexibility to continue growing its business and dividend (Kinder Morgan expects to increase its payout by around 2% in 2024, its seventh straight year of dividend growth). With natural gas demand expected to continue rising through at least 2030, Kinder Morgan should have lots of fuel to continue increasing its dividend.
A data-driven dividend
Equinix pays a decent dividend. At 2.1%, it's ahead of the S&P 500. More importantly, that above-average payout is rock-solid and should grow at a decent clip in the coming years.
The data center REIT generates very predictable cash flow backed by long-term leases with companies renting capacity in its data centers. Meanwhile, it pays a conservative portion of that cash in dividends (45% for 2023). That allows it to retain lots of money to fund new investments while maintaining a strong investment-grade balance sheet. Equinix has the strongest financial profile among data infrastructure REITs.
That gives it the funding capacity to invest in expanding its data center platform. The company plans to invest $3 billion annually through 2027 on maintaining and expanding its data center portfolio. Equinix estimates that those growth-related investments will help support 8% to 10% annual revenue growth through 2027. That should power dividend growth of more than 10% annually. The REIT has already boosted its payout twice this year (10% in February and 25% in October).
A cash-flow machine
Lockheed Martin's dividend currently yields 2.8%. The aerospace and defense company has increased its payout for 21 straight years.
The company generates lots of steady cash flow, expecting to produce around $8.2 billion in cash this year and $6.2 billion in free cash after funding capital expenses to sustain and grow its business. Lockheed aims to return all that cash to shareholders via dividends and share repurchases. Given its A-rated balance sheet, the company doesn't need to retain that cash.
The defense contractor expects its cash flow to grow in 2024 and beyond. Given its massive backlog of defense contracts ($156 billion at the end of the third quarter), it has lots of visibility into its cash flow. Meanwhile, that backlog should continue increasing, with defense spending rising due to wars in Ukraine and Israel.
In addition, the company sees its 21st Century Security Solutions strategy driving incremental growth. That strategy is already paying off. Lockheed recently won a transformational award for an integrated air and missile defense program from the Australian Defense Force. The company's growing cash flow will enable it to buy back more shares and increase its dividend.
Rock-solid dividend stocks
Kinder Morgan, Equinix, and Lockheed Martin pay safe dividends and earn contractually secured revenue, enabling them to produce predictable cash flow. On top of that, they have very strong balance sheets. Those features make them some of the most bankable dividends for 2024 and beyond.
