3 Unstoppable Dividend Aristocrats Who Are Passive Income Machines

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The dividend aristocrats, who are S&P500 components that have paid and increased their dividends for at least 25 consecutive years have received more attention lately thanks to their stability. Many dividend aristocrats are not the fastest growing companies. But by default, they increased their dividends during the COVID-19-induced recession, the worst of the US-China trade war, the financial crisis and the bursting of the dot-com bubble. Many have been doing it for much longer.

This track record is important in times of uncertainty when many investors are more concerned with preserving capital than taking unnecessary risks. 3M (MMM 0.95%), walmart (WMT 1.25%)and Pentair (PNR -0.61%) are three dividend aristocrats that might be worth buying now. Here’s why.

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This dividend stock will make you cry “hot digesty dog”

Scott Levin (3M)): Continuing to increase a dividend year after year is no small feat. It’s no wonder, then, that income investors are so enamored with dividend-paying companies like 3M, which currently offers a 4% forward dividend yield. The industrial stalwart has increased its dividend for 64 consecutive years, illustrating the company’s longstanding commitment to rewarding shareholders. Holding the rank of Dividend King (components of the S&P 500 that have increased their dividend for at least 50 years) is however not the only notable aspect that should attract the attention of income investors. The title is also a Dog of the Dow, one of the 10 most productive titles among the 30 titles that make up the Dow Jones Industrial Average. For several reasons, it seems that investors considering 3M for their portfolios are certainly barking up the right tree.

When it comes to higher-yielding dividend-paying stocks like 3M, it’s important for investors to do their due diligence and confirm that the company is in a financially secure position to maintain its payout to shareholders. Consistently generating strong cash flow, 3M is well positioned to continue to reward shareholders. Over the past 10 years, 3M has consistently generated free cash flow to cover its dividend.

Table of free cash flow per MMM share (annual)

MMM free cash flow per share (annual) given by Y-Charts.

Admittedly, like many companies, 3M faces headwinds when it comes to supply chain disruptions, leading it to report lower cash flow in the first quarter of 2022, but management isn’t ringing a bell. no alarm. The company forecasts adjusted free cash flow (which the company defines as adjusted free cash flow divided by net income) of 90% to 100% for 2022; moreover, it projects adjusted earnings per share of $10.75 to $11.25 for 2022.

Do you prefer the payout ratio to assess the company’s dividend in terms of its financial health? From this point of view, it is also clear that the management does not jeopardize the well-being of the company to satisfy the shareholders. Over the past 10 years, 3M has averaged a conservative payout ratio of 54.2%.

Walmart and its dividend are going nowhere

Daniel Foelber (Walmart): It’s hard to imagine. But in just one month, Walmart shares fell from a 52-week high of $160.77 per share to a 52-week low of $117.27 per share. That’s a 27% drop from peak to trough. Which is normally uncommon. But for Walmart, it’s even weirder.

After announcing earnings last week, Walmart stock suffered its biggest drop since “Black Monday” during the 1987 stock market crash. Target shares followed suit the next day with a 25% drop. When events like this happen in the stock market, you know something is up.

Walmart and Target gave a gloomy outlook for the economy. In summary, both companies have been under pressure to increase revenue during the worst of the pandemic as constrained supply chains forced retailers to order ahead due to long lead times. That build led to record inventories for both companies, which was good when consumer spending was healthy during a decades-long period of low unemployment and fiscal stimulus.

But the current rise in interest rates is causing consumer spending to tighten. Walmart finds that customers aren’t so eager to buy discretionary products, which offer higher margins, and are turning to low-margin staples instead. This change leaves Walmart with too much inventory that it will struggle to sell, as well as a workforce that could be too large if the economy goes into a recession.

In sum, the short-term outlook is not good. And Wall Street sold the shares accordingly. However, the long-term outlook is bright. Walmart has a cheap price-to-earnings ratio of just 19.1. Walmart also has an impressive 46-year track record of paying and increasing the dividend, as well as a 39% decrease in its number of shares outstanding through stock buybacks. This provides a double hit of passive income coupled with higher earnings per share.

WMT Dividend Table

WMT dividend given by Y-Charts

Recessions are turbulent times. But investors would do well to consider which companies have what it takes to survive a recession, and which may even take more market share during a recession. Walmart certainly fits that mold. Down 24% from its peak with a dividend yield of 1.9%, Walmart now looks like a good buy.

A game at home with the legs

Lee Samaha (Pentary): Being a dividend aristocrat is not only offer investors a stable and growing dividend; it also demonstrates a company’s long-term ability to grow profits and cash flow. Water solutions company Pentair’s dividend yield is only 1.7% currently, but the company has a lot of potential to significantly increase its dividend in the future. First, management’s forecast calls for adjusted earnings per share of between $3.70 and $3.80; the midpoint covers the $0.84 dividend by almost 4.5 times. Additionally, the company’s exposure to North American swimming pool equipment provides it with great potential for growth.

The stock has grown in prominence during the pandemic as a way to play up the theme of household investing. Consumers have shifted their spending towards home and garden in response to lockdown measures – great news for companies focused on pool equipment. Thus, Pentair’s sales have grown from nearly $3 billion in 2019 to nearly $3.8 billion in 2021.

Although there are concerns that rising interest rates will slow the housing market and ultimately spending on outdoor activities, readers should note that the swimming pool equipment market is primarily a replacement. The influx of new pools built during the pandemic should translate into long-term growth opportunities for the company.

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