Although dividend stocks can be a great way to generate passive income, they are riskier than fixed-income investments, like bonds and bank CDs. Companies are not obliged to pay dividends. That’s why these cuts are often among the first to be removed when businesses face financial difficulties. More than a dozen companies have cut their distributions in 2023, including former dividend stalwarts. Intel And VF Corp..
However, there are plenty of safe dividend stocks. Children Morgane (NYSE:KMI), Equinix (NASDAQ:EQIX)And Lockheed Martin (NYSE:LMT) are three ultra-safe dividend stocks because they generate contractually guaranteed cash flow and have strong financial profiles. This makes them excellent options for those looking to grow their dividend income in 2024 and beyond.
Plenty of fuel to pay dividends
Kinder Morgan offers investors a sizable dividend that currently yields 6.3%. This places it among the 5% highest returns in the S&P500, where the average is 1.5%. Although a high dividend yield is often a warning sign of a possible cut, it is not a risk to Kinder Morgan’s payout.
The gas pipeline giant generates incredibly stable cash flow. It earns 61% of its profits from take-or-pay contracts (meaning it gets paid even if customers don’t use the subscribed capacity), while hedging contracts lock in a further 6% of its profits.
Meanwhile, fee-based contracts provide 26% of the company’s profits (although these contracts carry volume risk, the same fees are paid regardless of commodity prices). This leaves just 7% of its cash flow exposed to commodity price and volume risk. Kinder Morgan’s very tight cash flow gives it great visibility into its earnings. It expects to generate $5 billion, or $2.21 per share, in cash flow in 2024.
Kinder Morgan will pay out just over 50% of its stable cash flow as dividends next year. This allows it to retain substantial liquidity to finance expansion projects while maintaining a strong balance sheet.
The company currently expects its leverage ratio to end next year at around 3.8 times, well below its long-term target of 4.5 times. This gives it enormous financial flexibility to continue growing its business and dividends (Kinder Morgan plans to increase its dividend by about 2% in 2024, its seventh consecutive year of dividend growth). With demand for natural gas expected to continue to rise through at least 2030, Kinder Morgan should have enough fuel to continue growing its dividend.
A data-driven dividend
Equinix pays a decent dividend. At 2.1%, it’s higher than the S&P 500. More importantly, this above-average payout is rock solid and expected to grow at a decent rate in the years to come.
THE Data Center REITs generates highly predictable cash flows supported by long-term leases with companies leasing capacity in its data centers. At the same time, it pays a conservative portion of this cash in the form of dividends (45% for 2023). This allows it to retain plenty of cash to fund new investments while maintaining a strong investment-grade balance sheet. Equinix has the strongest financial profile among data infrastructure REITs.
This gives it the financing capacity to invest in the expansion of its data center platform. The company plans to invest $3 billion annually through 2027 in maintaining and expanding its data center portfolio. Equinix estimates that these growth-related investments will help support annual revenue growth of 8-10% through 2027. This should enable dividend growth of over 10% per year. The REIT has already increased its distributions twice this year (10% in February and 25% in October).
A cash machine
Lockheed Martin the dividend currently yields 2.8%. The aerospace and defense company has increased its payouts for 21 consecutive years.
The company generates plenty of steady cash flow and expects to produce about $8.2 billion in cash this year and $6.2 billion in free cash flow after funding capital expenditures to support and grow its business. Lockheed aims to return all that money to shareholders through dividends and stock buybacks. Given its A-rated balance sheet, the company has no need to retain this cash.
The defense contractor expects its cash flow to increase in 2024 and beyond. Given its enormous backlog of defense contracts ($156 billion at the end of the third quarter), it has great visibility over its cash flow. At the same time, this backlog is expected to continue to grow as defense spending increases due to the wars in Ukraine and Israel.
Additionally, the company sees its 21st century security solutions strategy driving incremental growth. This strategy is already bearing fruit. Lockheed recently won a transformational award for an integrated air and missile defense program from the Australian Defense Force. The company’s growing cash position will allow it to buy back more shares and increase its dividend.
Rock-Solid Dividend Stocks
Kinder Morgan, Equinix and Lockheed Martin pay secure dividends and generate contractually guaranteed income, allowing them to produce predictable cash flows. On top of that, they have very strong balance sheets. These characteristics make it one of the most profitable dividends for 2024 and beyond.
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Matthew DiLallo has positions in Equinix, Intel, and Kinder Morgan and has the following options: long January 2025 $30 calls on Intel, short February 2024 $50 calls on Intel, short January 2025 $30 calls on Intel, and short shorts $50 on Intel in March 2024. The Motley Fool holds positions and recommends Equinix and Kinder Morgan. The Motley Fool recommends Intel and Lockheed Martin and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Mad Motley has a disclosure policy.
3 Ultra-Safe Dividend Stocks to Buy for 2024 and Beyond was originally published by The Motley Fool