Want $5,000 in passive income? Invest $30,000 in these 3 stocks and wait 3 years

Last week’s Consumer Price Index report from the US Bureau of Labor Statistics said inflation is now at 7.5%, a 40-year high. Firms with pricing power can help pass on some of these costs to their customers. And stocks that pay dividends provide a passive income stream that also helps offset inflation.

Invest equally Rio Tinto (NYSE:RIO), Kinder Morgan (NYSE: KMI)and Autoliv (NYSE:ALV) gives an investor an average dividend yield of 5.8% and exposure to different sectors of the economy. This is what makes everyone dividend share a good buy now.

Image source: Getty Images.

Push your passive income pedal to the metal

Scott Levin (Rio Tinto): With a market capitalization of nearly $130 billion, Rio Tinto is one of the largest mining stocks available to investors. Similarly, its eye-popping 8.7% forward dividend yield is a particularly high option for investors looking to swim in a large stream of passive income.

Experienced investors know that chasing high returns can be a daredevil endeavor. But in Rio Tinto’s case, even conservative investors can find reason to be confident that the company’s high payout doesn’t put it financially at risk.

Over the past four years, the company has averaged a payout ratio of 57%. And it doesn’t seem like management‘s cautious approach is waning; over the past 12 months, Rio Tinto’s payout ratio is 40.3%. Skeptics, on the other hand, may have less faith in the payout ratio because mining companies can massage non-cash charges like depreciation (compared to the value of their mining assets) and arrive at figures of misleading profits, which would skew the result. The payout ratio. Still, consider the company’s free cash flow and the high dividend looks well covered. Over the past five years, Rio Tinto’s average annual distribution per share is $2.82, a period during which Rio Tinto generated average annual free cash flow per share of $4.21.

Given that the company’s financial success is sensitive to the vicissitudes of market prices, the likelihood that Rio Tinto can continue to return cash to shareholders may be met with some skepticism. This is a fair point, but it is also important to recognize that the company is not singularly concerned with the production of a mineral. Instead, it has a portfolio that reflects a diversity of assets, including iron ore, copper, aluminum, lithium and diamonds – a diversity that mitigates the risk of a single commodity suffering a price drop.

A safe bet in the oil and gas industry

Daniel Foelber (Child Morgan): Rarely does an investment offer a combination of reliable income, value and high dividend yield. Kinder Morgan provides investors with this potpourri, but it’s a stock that’s often misunderstood.

Investors are passing Kinder Morgan thinking it’s a volatile oil and gas stock. But in reality, Kinder Morgan generates predictable cash flow of its pipelines, terminals, storage and other energy infrastructure. More than 90% of its activity is linked to multi-year take-or-pay and lump-sum contracts. This predictability is what allowed Kinder Morgan to forecast its 2020 performance with 99% accuracy since April 2020. This is also why Kinder Morgan has already published its forecast for the year 2022.

Kinder Morgan expects to generate slightly lower adjusted earnings before interest, tax, depreciation and amortization (EBITDA) and distributable cash flow (DCF) in 2022 than in 2021. But its net profit is expected to hit a five-year high .

Metric

2022 (expected)

2021

2020

2019

2018

Adjusted EBITDA

$7.2 billion

$7.9 billion

$7 billion

$7.7 billion

$7.6 billion

FDC

$4.7 billion

$5.5 billion

$4.6 billion

$5 billion

$4.7 billion

Net revenue

$2.5 billion

$1.8 billion

$119 million

$2.2 billion

$1.5 billion

Dividend cost

$2.5 billion

$2.4 billion

$2.4 billion

$2.2 billion

$1.6 billion

Divide by share

$1.11

$1.08

$1.05

$1.00

$0.80

Data source: Kinder Morgan.

Kinder Morgan is also increasing its dividend to $1.11 per share per year, representing a yield of 6.3%. Kinder Morgan’s strong DCF says it can support its cash dividend even as it increases spending on new projects and invests in growing its legacy natural gas infrastructure, liquefied natural gas and other alternative energy investments.

Kinder Morgan might not prosper as much as oil service companies and upstream producers during periods of high oil prices. But it also won’t go bankrupt during downturns. Kinder Morgan is a great option for risk-averse investors looking to generate passive income that helps offset inflation.

Safety first with Autoliv

Lee Samaha (Autoliv): The airbag, seatbelt and steering wheel company has a dominant position in the passive safety market, and it’s also a sure way to play a recovery in global light vehicle (LVP) production. For reference, Autoliv claimed 50% of orders in its end markets in the fourth quarter, above management’s target of 45% of the overall market.

It has not been the best of times for auto parts manufacturers. A combination of soaring raw material costs, supply chain issues, and lower LVP due to autochip shortages squeezed revenues and profit margins.

But here’s the thing. Demand remains high and automotive chipmakers are make massive investments to increase capacity. That’s not to say the autochip supply situation will ease overnight; it won’t, as it takes time for new factories and expansions to come online. But this means that the supply will eventually increase.

Autoliv management expects global LVP to increase by 9% in 2022. Additionally, given its exposure to strong passenger safety trends and multiple product launches, management expects Autoliv’s organic sales growth of 20% in 2022. Add to that an easing of raw material costs and supply chain issues, and Autoliv should be well on its way to a multi-year path of revenue and profit growth. Meanwhile, waiting for that to happen, you can earn a dividend yield of 2.5% at the current price. It’s a compelling investment proposition.

10 stocks we like better than Rio Tinto Group
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* Portfolio Advisor Returns as of January 20, 2022

Daniel Foelber has no position in the stocks mentioned. Lee Samaha has no position in the stocks mentioned. Scott Levin has no position in the stocks mentioned. The Motley Fool owns and recommends Kinder Morgan. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

About Donnie R. Losey

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