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3 Under-Appreciated Dividend Stocks That Can Provide Passive Income for a Lifetime

Motley Fool - Wed Oct 25, 2023

One of the best feelings in the stock market is to find a hidden gem company. Sometimes, it's a breakout growth stock. Other times, it can be a quality dividend stock hiding in plain sight.

Baker Hughes(NASDAQ: BKR), Kinder Morgan(NYSE: KMI), and Essential Utilities(NYSE: WTRG) may be overlooked in favor of dividend-paying companies in less cyclical or easier-to-understand industries. However, all three companies value the dividend as a primary way to return value to shareholders. Here's why each company is set up nicely to juice your passive income stream for years to come.

A drilling rig in a desert setting.

Image source: Getty Images.

Baker Hughes offers upside exposure to oil, gas, and LNG investment

Lee Samaha(Baker Hughes): The oil and natural gas services and equipment company's current dividend yield is 2.3%, with a $0.80 per share annual payout. Still, I think there's ample room for improvement over the long term. As a company tied to the energy industry's fortunes, its earnings will always be somewhat led by energy prices.

That said, CEO Lorenzo Simonelli believes the current cycle of higher oil prices could prove more durable than previous cycles. He argues that the discipline displayed in investment by the oil majors will smooth out the cyclicality of prices. So far, he seems to be correct. There's no shortage of signs of weakness in the economy, yet the price of oil stands above $89 a barrel, as I write.

While that may be correct, and history suggests it can do so sharply, the fact remains that oil majors are spending relatively less on investment than in the previous cycle. Moreover, members of the Organization of the Petroleum Exporting Countries+ (OPEC+) continue to curtail production to support higher prices.

In addition, Baker Hughes also has growing exposure to liquefied natural gas (LNG) spending, and the strength of its LNG orders in the second quarter encouraged management to raise its full-year earnings expectations. Meanwhile, Baker Hughes also has exposure to new energy (e.g., carbon capture, compression, hydrogen, etc.), which management expects to result in 10% of its gas technology orders in the next few years.

While there's no guarantee the price of oil will stay relatively high over the next decade, it's a good idea to diversify a portfolio to profit if it does, and Baker Hughes is a great way to do it.

A high yield backed by powerful cash flow

Daniel Foelber (Kinder Morgan): The oil and gas industry is a hotbed for under-appreciated dividend stocks -- particularly in the midstream part of the value chain. Midstream companies like Kinder Morgan are essentially in the business of infrastructure investing.

The goal is to fund projects needed to transport and store natural gas, oil, diesel, and other liquid fuels and then collect fees from those projects over time. Simple enough. But the effectiveness of these capital investments comes down to execution, price, and location, among other factors.

Kinder Morgan mainly relies on natural gas infrastructure. But it also has a balanced portfolio of carbon dioxide, liquids pipelines, and terminals. Altogether, the company generates distributable cash flow that well exceeds capital costs and the dividend.

Kinder Morgan reported its Q3 results on Oct. 18, forecasting 2023 discounted cash flow (DCF) of $2.13 per share, and approved a quarterly cash dividend of $0.2825 per share ($1.13 annualized). The company's financial health has improved in recent years. Paired with Kinder Morgan's strong performance, the company has been able to make meaningful dividend raises and stock buybacks.

In past years, the rapid advance of the energy transition challenged the long-term value of legacy infrastructure assets. But a heightened focus on energy security puts a premium on the reliability and proven nature of oil and gas.

The incredible outperformance of energy stocks over the last few years is a clear signal from the market that the oil and gas industry was undervalued. Given the long-term contract nature of its business, Kinder Morgan and other midstream companies don't benefit from surging oil and gas prices in the same way an exploration and production company does. However, the new perspective on oil and gas is good for Kinder Morgan long term in its ability to both justify new capital investments and extend the useful life of its existing infrastructure.

Kinder Morgan and its 6.6% dividend yield are a worthy choice for income investors looking to invest in U.S. oil and gas but without the risks that come with the upstream side of the industry.

Wet your whistle for passive income with Essential Utilities

Scott Levine (Essential Utilities): When mining the market for dividend stocks that can provide ample passive income for years to come, investors need to consider a variety of factors -- one of which is the resiliency of the business. This, in part, is the allure of Essential Utilities, a leading water services and natural gas utility. With a history that stretches back to 1886 and an impressive streak of rewarding shareholders via dividends, Essential Utilities and its 3.7% dividend yield are worth consideration for income investors.

Because Essential Utilities primarily operates in regulated markets -- accounting for 97% of operating revenue in 2022 -- management has clear insight into future cash flows. This avails the company of the ability to plan adequately for capital expenditures, such as acquisitions and dividends. In 2023, for example, Essential Utilities has completed six acquisitions for a combined $45 million, resulting in the company adding more than 11,000 customers.

Further, its pending acquisitions represent the potential to add more than 211,000 additional customers. Increasing the customer base is essential for the company to achieve financial growth since operating in regulated markets prevents it from arbitrarily raising rates when it feels like it.

For 78 consecutive years, Essential Utilities has paid a dividend, and the company has hiked the dividend 33 times in the last 32 years. Achievements such as those are not easily attained and suggest that management is adept at managing dividend hikes and the company's financial health. (S&P Global and Moody's have issued investment-grade ratings on Essential Utilities.)

While the company won't likely steal any headlines from more popular tickers, the steady nature of this business bodes well for income investors looking to supplement their passive income stream -- just as it has done for investors for nearly 80 years.

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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 has positions in and recommends Kinder Morgan, Moody's, and S&P Global. The Motley Fool has a disclosure policy.

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