Want $1,500 in Passive Income? Invest $10,000 in These 3 Dividend Aristocrats and Wait 5 Years

When the stock market is red-hot and showing no signs of slowing down, a dividend payment here and there seems like a drop in the bucket. But when the bear market drags on and companies are down big off their highs, passive income can provide a much-needed incentive to hold stocks through periods of volatility.

Investing in equal parts of ExxonMobil (NYSE: XOM), PPG Industries (NYSE: PPG), and Stanley Black & Decker (NYSE: SWK) gives an investor a dividend yield of 3%. Over a period of five years, you can expect a $10,000 investment in this basket to produce $1,500 of passive income. What’s more, all three companies are high-quality Dividend Aristocrats, which are S&P 500 components that have paid and raised their dividends for at least 25 consecutive years. Here’s what makes each company a great buy now.

Two people sitting down holding paint tools look up at a messy blotch of blue paint on a white wall.

Grease the wheels of passive income growth with ExxonMobil 

Scott Levine (ExxonMobil): With energy prices soaring in 2022, investors looking to fuel their passive income stream have paid increasing attention to oil and gas stocks. There are some strong high-yield dividend candidates to consider among this lot, but other energy stocks — albeit with lower yields — are also worthy considerations. ExxonMobil, for instance, currently offers investors an attractive 3.2% forward dividend yield and the reassurance that management is committed to rewarding shareholders.

For four decades, ExxonMobil has consistently hiked its payout to shareholders — raising the dividend at an average annual rate of 5.9%. Naturally, that doesn’t guarantee that the company will achieve the same feat over the next four decades, but it’s certainly a notable data point.

Operating throughout the energy value chain, ExxonMobil is an oil supermajor that shows little indication it will lose its place as one of the largest energy companies worldwide. The company has numerous growth projects in the works that management expects to contribute more than $4 billion in annual earnings growth by 2027. The company’s cash flow is also expected to benefit. Assuming a $60 price per barrel for Brent crude, ExxonMobil forecasts its operational cash flow has the potential to double from approximately $30 billion in 2019 to about $60 billion in 2027. This bodes well for income investors as the company will have ample resources to continue hiking the dividend.

With shares of ExxonMobil trading at about 9.9 times forward earnings — a discount to its five-year average forward earnings multiple of 17.8 — forward-looking income investors have a great opportunity to plant the seeds of steady passive income growth without having to pay an arm and a leg.

PPG Industries is here to stay

Lee Samaha (PPG Industries): If you are thinking of committing to a stock long-term, it makes sense to buy a Dividend Aristocrat that’s likely to be around for decades. That’s where paint and coatings company PPG Industries comes in. It’s not a coincidence that its competitor, Sherwin-Williams, is also on the Dividend Aristocrat list.

The reason for this is simple. As long as there’s a need for physical products — buildings, vehicles, packaging, etc. — there’ll be a need for painting and coating them. The broad-based end market exposure gives PPG exposure to the trend of economic growth. As such, PPG has a long history of growing earnings and, in turn, cash flow, which it uses to grow the business or return to shareholders, either through buybacks or dividends.

PPG Dividend Per Share (Annual) Chart

Moreover, the paint and coatings market is in an ongoing process of consolidation, and that should enable leading companies like PPG and Sherwin-Williams to generate margin expansion in the future. So, all told, investing in PPG is a pretty safe option for income-seeking investors.

A worthy candidate for a powerhouse passive income portfolio

Daniel Foelber (Stanley Black & Decker): The tools and accessories company has been struggling due to declining consumer demand and inefficiencies in its cost structure. As a result, the stock is down 62% from its all-time high, quite the blow for a reputable blue chip dividend name.

Stanley Black & Decker can’t control the business cycle and will need time to turn its business around. The good news is that it is taking steps to ensure it limits the pain. The main highlight from its third-quarter 2022 report was that the company reduced debt by $3.3 billion, or 29%, thanks to oil and gas divestitures and the sale of its automatic door business for $900 million in cash.

While it’s true the company’s balance sheet is in its worst shape in 10 years, it’s important to note that its balance sheet was healthy coming into 2021. And that the cost cuts and restructuring should lead to further debt reduction.

Stanley Black & Decker is a turnaround play for the patient investor. Its 3.9% dividend yield is the highest yield the stock has had in nearly 15 years. As a Dividend King that has paid and raised its dividend for 55 consecutive years, the company has been through plenty of cycles in the past.

Although its track record is certainly a core part of the investment thesis, Wall Street is forever forward-looking. This means investors should monitor the company closely to make sure it continues paying down debt and executes an effective restructuring. If the cycle does turn and Stanley Black & Decker fails to capitalize on it, that would raise another red flag. Or if the company hits a roadblock with its restructuring and loses further ground due to a weakening economy, that would be yet another red flag.

In sum, there are a lot of challenges and unknowns facing the company, whose investors are used to more certainty. The silver lining is that the stock has been so punished that it’s now worth a look for patient 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 has no position in any of the stocks mentioned. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.