3 Unstoppable Dow Dividend Aristocrats That Are Passive Income Machines

These companies are well-positioned to combat inflation.

These companies are well-positioned to combat inflation.

The stock market is all over the place these days, notching a combination of up days and brutal down days as it struggles to interpret a mixed bag of macroeconomic data and company-specific problems. And with earnings season underway, investors’ eyes will undoubtedly fall on how companies are performing and expect to perform during a period of rising interest rates and geopolitical tensions.

Chevron ( CVX -2.21% ), Caterpillar ( CAT -6.55% ), and Walmart ( WMT -1.88% ) are all Dow Jones Industrial Average stocks and all have proven short-term and long-term upside potential that makes them good companies to buy even if volatility escalates from here. What’s more, all three stocks are Dividend Aristocrats, which are S&P 500 components that have paid and raised their dividend annually for at least 25 consecutive years.

Here’s what makes these three Dow companies a great buy now.

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1. Chevron: A high-yield dividend stock for good times and bad

It’s no secret that oil and gas stocks are absolutely crushing the market so far in 2022, just like they did in 2021. But it wasn’t long ago that oil and gas was the worst-performing sector. In 2020, stocks in the energy sector fell an average of 36.5% compared to a 16.3% gain in the S&P 500. Even after the energy sector’s recent monster gain, it still produced a total return below the S&P 500’s total return over the last three years.

^IXE Chart

^IXE data by YCharts

High oil and gas prices could continue, given years of underinvestment in the industry. Another force driving oil prices higher is the shifting supply/demand dynamic due to geopolitical tensions. The European market, and other markets around the world, are trying to replace oil and gas imports from Russia — one of the three largest oil and gas exporting countries in the world. This decision effectively wipes out a lot of supply from the market, which creates an even greater imbalance as the global economy opens up again.

Chevron stock is hovering around its all-time high at the moment. But there are many reasons why it is still a great buy now. For investors who think Chevron’s earnings will be higher in 2022 than they were in 2021, the stock’s 21.1 price-to-earnings (P/E) ratio looks very affordable. Chevron also has a 3.4% dividend yield. Better yet, it has a lower debt-to-capital and financial-debt-to-equity ratio than ExxonMobil, BP, Shell, and TotalEnergies — meaning its balance sheet is well-positioned to handle an environment of lower oil and gas prices. Chevron also made timely investments during the 2020 downturn that look brilliant in hindsight. And finally, Chevron lost less money in 2020 than ExxonMobil, BP, Shell, and TotalEnergies — which shows it was better positioned to handle a steep downturn. 

Chevron doesn’t have as much upside as a pure-play exploration and production company like ConocoPhillips. But its diversified business model, low cost of production, and rock-solid balance sheet make it the best all-around energy stock to buy now.

2. Caterpillar is a coiled spring for years of growth

Despite ongoing supply chain disruptions, Caterpillar’s most recent earnings report showed signs that its business is returning to its pre-pandemic levels. Caterpillar’s fourth-quarter 2021 revenue was the highest in nearly three years, and Q4 2021 net income was the highest quarterly performance in five years. Caterpillar finished 2021 with a record-high net income of $6.49 billion — which is the main reason its P/E ratio is just 18.4 despite the strong performance in the underlying stock price.

CAT Revenue (Quarterly) Chart

CAT Revenue (Quarterly) data by YCharts

Given the current state of the oil and gas, consultation, mining, and agricultural industries, it would seem Caterpillar could be due for a breakout year in 2022.

For context, Caterpillar hasn’t been able to sustain a multi-year period of consistent revenue and earnings growth since the early 2010s. Part of the reason for that is the business cycle itself. But the U.S.-China trade war and the COVID-19 pandemic also disrupted any hopes of revenue and earnings growth.

Caterpillar’s all-time high annual revenue of $65.9 billion was 10 years ago in 2012. There’s a good chance it could set a new record this year. But the big question for cyclical stocks like Caterpillar is whether or not they can sustain a multi-year upcycle. Multi-year upcycles provide extra free cash flow needed to pay down debt or repurchase stock. Caterpillar’s balance sheet is in decent shape but could stand to benefit from a few good years in a row. Regardless of when the next upcycle occurs, Caterpillar pays investors to wait with a 2.1% dividend yield.

3. Inflation is no problem for Walmart

Walmart stock hit a new all-time on April 20 as investors flock toward stocks that are resistant to inflation. 

CVX Chart

CVX data by YCharts

The short-term investment thesis for Walmart stock is very simple. In an inflationary environment, consumers will curb discretionary spending and focus more on essentials. It goes without saying that higher food costs, energy costs, and prices at the pump hit the lower and middle class a lot more than the upper class. So as prices rise, the thinking is that consumers will start to buy their household goods, clothes, and other essentials at Walmart instead of a higher-priced retailer.

Walmart’s short-term upside complements its long-term investment thesis, which is grounded in a strong balance sheet, a history of dividend raises and share repurchases, stable and growing earnings, and a reasonable valuation. 

A diversified basket that is built for tough times

Chevron, Caterpillar, and Walmart may be from different sectors of the economy, but all three companies have a lot in common (aside from being DJIA components) when it comes to why they are good dividend stocks to buy now. Each company is resistant to inflation and can perform well even if the economy starts to slow.

What’s more, all three companies are Dividend Aristocrats, so investors can count on them for a stable and growing passive income stream even if the economy spirals into a bear market. Add it all up and you have three reliable stocks that are worth considering now.

Read this article on Motley Fool

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