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Looking to Generate Passive Income? Consider These 3 Dividend Stocks

Stock market volatility is back, and many high-growth Nasdaq stocks are trading well below their recent highs. In this environment, many investors are looking to add some order to their portfolios by transitioning away from growth toward value, while others are simply looking to add some income investments to the mix.

If you're among them, consider 3M (NYSE: MMM), Brookfield Renewable (NYSE: BEPC) (NYSE: BEP), and Kinder Morgan (NYSE: KMI). Those three offer investors an average dividend yield of 4.3%, and each is a great income stock to buy now.

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3M's dividend is sustainable, and management can improve the business

Lee Samaha (3M): It's fair to say 3M has some work to do to convince investors of its worth. The company hasn't been able to offset rising costs as well as some of its peers have. Despite increasing its sales guidance through 2021, management recently cut its full-year earnings guidance. As a result, it has delivered a somewhat underwhelming performance, particularly as management has been restructuring the company to improve operations and profitability.

That said, it's also fair to say that 3M remains a good value stock, and its dividend -- which yields 3.3% at the current share price -- is sustainable and enticing at a time when that's more than twice the S&P 500's average yield.

As such, the case for buying 3M isn't based on the idea that it's a great company right now, but that -- trading at 18 times its estimated 2021 free cash flow (FCF) -- it's a good value. Management can use free cash to increase the dividend, make stock buybacks, or make mergers and acquisitions to buy growth.

Moreover, it's much easier for management to restructure a company when it's blessed with copious earnings and cash flow. Overall, investors who buy 3M stock today probably aren't doing so based on what it is now, but what it could become in the future. And they'll get a dividend that yields 3.3% at current share prices while they wait.

A renewable power leader that's a passive income powerhouse

Scott Levine (Brookfield Renewable): Some investors' hearts may race at the thought of finding the next great growth stock, or at the chance to scoop up shares of a quality company on sale.

Others, however, take delight in sitting back and doing nothing while they rake in the steady streams of income from dividend stocks. Whichever type of investor you fancy yourself, buying quality dividend payers such as Brookfield Renewable is a sound way to fortify your portfolio.

Electric vehicle companies may currently be the talk of the town among investors, but experienced green energy enthusiasts know that Brookfield Renewable is one of the most compelling clean energy options out there. The company, which offers investors an enticing 3.3% dividend yield at current share prices, has a massive portfolio with 20 gigawatts of operating capacity across solar, hydropower, wind, and energy storage. And there's more coming down the pike. Brookfield Renewable also has 31 gigawatts worth of projects in its pipeline. That hefty pipeline should help allay any concerns that skeptical investors might have regarding how management plans to meet its goal of growing its dividend at annual rates of between 5% and 9% over the next few years.

High dividend yields may seem alluring, but savvy investors recognize that it's foolhardy to chase them without ensuring that the companies paying them are in sound enough financial shape to keep supporting those payouts. On that score, investors need not worry about Brookfield Renewable. The company operates by signing long-term power purchase agreements -- the average length of which is 14 years -- with customers. Those agreements give management clear insight into the company's future cash flows.

Slow and steady wins the race

Daniel Foelber (Kinder Morgan): How well a company can generate dividend income for its shareholders boils down to the strength of the underlying business, its track record for paying and increasing its dividend, and the size of the yield. While some companies may have Kinder Morgan beat in one of these categories, few strike the balance among them that the pipeline giant offers investors.

Let's start with the yield. Kinder Morgan's jaw-droppingly high 6.6% dividend yield is enough to compensate for even this year's high inflation -- and only a bit lower than the long-term average annual return of the S&P 500, which is around 7% or 8%. The question now is whether it can back it up?

Upwards of 90% of Kinder Morgan's business is tied to long-term contracts that give it stable cash flows in good times and bad. Instead of using its cash flow to rapidly grow the business by building many more pipelines, terminals, and other midstream projects, Kinder Morgan has instead chosen to be selective, taking on projects only when the market is begging for them.

The company's pipelines connecting West Texas natural gas extraction sites to liquefaction facilities along the U.S. Gulf Coast exemplify this approach. Kinder Morgan built those pipelines not because it hoped they would succeed, but because it was clear that there wasn't enough takeaway capacity to transport the growing output from America's largest oil and gas field. It's this mindset that makes Kinder Morgan so stable.

The biggest risk facing Kinder Morgan is the world's long-term transition away from oil and natural gas and toward renewable energy. To compensate, Kinder Morgan is doing everything it can to limit spending and debt, as well as investing in areas that offer high growth potential such as liquefied natural gas (LNG) and renewable natural gas (RNG). All stocks have their risks. And given Kinder Morgan's industry-leading position and high dividend yield, its risks could well be worth taking for income investors.

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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine owns shares of Brookfield Renewable Corporation Inc. The Motley Fool owns shares of and recommends Brookfield Renewable Corporation Inc. and Kinder Morgan. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.


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