Want $3,000 in Passive Income? Invest $20,000 in These 2 Dow Dividend Kings and Wait 5 Years

Key Points

These two companies have historically been able to raise their dividends through periods of high inflation.

3M has its issues, but its valuation and dividend yield are too attractive to ignore.

P&G continues to post strong organic growth in the face of rising costs.

According to last week’s federal Consumer Price Index report, U.S. inflation is now the highest it has been in 40 years. Inflation of 7.5% means that costs will go up and many businesses will have a difficult time retaining high margins. Companies that produce positive free cash flow, turn a profit, and maintain a sturdy balance sheet stand a better chance of persevering through elevated inflation, even if it lasts longer than expected.

3M ( NYSE:MMM ) and Procter & Gamble ( NYSE:PG ) aren’t the most exciting companies, but they make up for their lack of flair with stable and reliable dividends. 3M has paid and raised its dividend for 64 consecutive years, while P&G has paid and raised its dividend for 65 consecutive years. That makes both companies Dividend Kings — members of the S&P 500 that have paid and raised their dividends for at least 50 consecutive years. Here’s what makes 3M and P&G great buys now. Image source: Getty Images. 3M is turning its business around

Out of the 30 companies that make up the Dow Jones Industrial Average (DJIA), 3M has been the third-worst-performing over the past five years, beating only International Business Machines and Walgreens Boots Alliance . At recent prices, 3M has produced a paltry 3.7% total return over that stretch, compared to 91% for the DJIA.

In many ways, the maker of N95 masks and Post-it notes (among other things) deserved to underperform the S&P 500 and DJIA. From 2016 to 2020, 3M increased revenue by just 7%, net income by 8%, and free cash flow by 26%, which is terrible even for a stodgy, dividend-paying company.

But 3M turned things around in 2021, when it grew revenue by 9.8% year over year to $35.35 billion and net income by 8.7% to $5.92 billion — both all-time highs for the company. MMM Revenue (Annual) data by YCharts. The ongoing issue with 3M is that the company continues to post low-single-digit organic growth while struggling to improve its profitability . “Operating margins were impacted by higher raw materials, logistics, and outsourced hard goods manufacturing costs, manufacturing productivity impacts, along with increased compensation and benefit costs,” said CFO Monish Patolawala on the company’s recent fourth-quarter conference call.

3M is clearly feeling the effects of inflation on its business and is unlikely to be able to pass along all the added costs to customers. Faced with the likelihood that it will have to absorb some of those costs, 3M’s operating margin could very well fall this year.

3M may have its problems. But it’s also an industry-leading business with a great balance sheet and a track record of outlasting tough times. Most importantly, 3M is also an incredibly inexpensive stock. At recent prices, it was trading at a price-to-earnings ratio of just 15.8, compared to its five-year median P/E of 20.6. With a 3.8% dividend yield, 3M is simply too cheap and has too high a yield to pass up. A rock-solid consumer staple behemoth

Like 3M, Procter & Gamble makes products we use in our everyday lives. So naturally, it’s an easy business to understand. However, unlike 3M, share prices of P&G are within striking distance of their all-time highs as P&G continues to deliver strong organic growth from a focused portfolio of brands.

P&G’s restructuring from its fiscal 2015 to its fiscal 2017 paved the way for a more efficient business with better margin expansion and FCF generation. (P&G’s fiscal year ends June 30.) In 2021, P&G delivered excellent results while many other consumer staples companies faced declining margins after they were unable to offset the impact of rising costs and supply chain challenges.

P&G expects rising commodity costs, higher freight costs, and higher negative foreign exchange impacts to inflict a $2.8 billion after-tax headwind on its fiscal 2022 results, or a negative impact of approximately $1.10 in earnings per share (EPS). Yet even with that headwind, P&G forecasts core earnings growth of 3% to 6% versus fiscal 2021 core EPS of $5.66. Put another way, P&G is forecasting around $7.00 in core EPS if you factor out the $2.8 billion headwinds, which goes to show how well its business would be performing if it weren’t for short-term challenges.

The glass-half-empty […]

source Want $3,000 in Passive Income? Invest $20,000 in These 2 Dow Dividend Kings and Wait 5 Years