I like to invest in dividend stocks. I like to see the income flowing into my portfolio. It gives me more money to reinvest in income-producing investments. That increases my passive income stream towards my ultimate goal of eventually reaching the level where it can offset my regular expenses.
I’ve hit a number of speed bumps in achieving that goal over the years as the companies I owned cut their dividends. One of those disappointing investments is 3M (NYSE: MMM). The industrial giant ended a streak of more than 60 consecutive years of dividend growth when it cut its payout earlier this year. That reduction prompted me to sell my stake. I’ve used a few of them add cash to start a new position Hot tub (NYSE:WHR) for my income portfolio. This is why I made that switch.
Abdicating his throne
3M was one of the most reliable dividend stocks around. Its more than half-century history of dividend increases was among the elite group Dividend kings. However, a series of problems forced the industrial giant to cash in some difficult decisions, including cutting the dividend.
A few of the company’s products caused something very expensive legal issues. Ultimately, it agreed to pay approximately $18.5 billion to settle these claims. That’s a lot of money, even for a company as financially strong as 3M. As a result, the company has taken several steps to maintain its financial flexibility so that it is possible to cover these payments and other capital needs.
One of his moves was turn off to create its healthcare unit Solvent. 3M loaded that entity with debt, giving it more financial flexibility. The downside of the spinoff, however, was that it took away a large portion of 3M’s cash flow. As a result, the company reset its dividend after the spin and cut it by about 50%.
3M’s dividend was a major reason why me in the first place invested in the company years ago. I was looking for a high-quality and steadily increasing payout. Although 3M achieved that steady growth for years, legal problems proved to be the case are too much to maintain the payout each longer. With the dividend a shell of what it used to be, I decided it was time to sell 3M. I also sold my shares in Solventum, as that company has no plans to pay a dividend anytime soon as it needs to pay off some of the debt 3M saddled it with before the spin.
This dividend stock comes close At home
I used some of the proceeds from my sale of 3M/Solventum to buy shares of Whirlpool. The iconic appliance maker is a company that has been on my radar for a while, not just because it pays a dividend. My wife and I recently purchased a new home, and with that came the need to purchase new appliances. Whirlpool makes many of the appliances we want to buy.
When researching equipment, I also started looking more closely at the stock. It struck me for the first time that it pays out a pretty attractive dividend (currently yielding almost 7%). The company has been paying dividends for seventy years. While it hasn’t increased its payout every year (its dividend was last increased in 2022), it has never cut its payout:
As I learned from 3M (and others), a strong dividend history is no guarantee that the company will be able to achieve similar success in the future. But Whirlpool is in a good one position to maintain its dividend despite the current headwinds. The dividend will cost the company about $400 million this year, which it can easily cover with free cash flow (estimated to be about $500 million after capital expenditures and other items). Whirlpool is looking to boost its free cash flow by selling some of its international operations, which, along with other initiatives, should reduce its global cost structure by $300 million to $400 million. The country is also working to reduce debt, which should lower interest costs.
Meanwhile, the company expects the housing market to improve to eventually recover when interest rates fall. That should lead to higher sales as home sellers replace their appliances to attract more buyers, or new homeowners buy new ones after moving in. I can vouch for this; my wife and I hated the refrigerator in our new house (not a Whirlpool) so much that we are buying a new one. That replacement cycle should boost Whirlpool’s revenue and operating income, putting the dividend on an even stronger foundation.
Generate a lot of income
3M’s dividend cut was a huge disappointment, given its long history of steady growth. That’s why I recently sold my shares to make way for Whirlpool. The company pays a much higher yielding dividend that it should be able to sustain in the current housing market downturn. Though it still faces headwinds that prevent it from increasing its payout in the short term, I think it will be a solid income stock in the long run as cash flows into my account.
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Matt DiLallo has positions in Whirlpool. The Motley Fool recommends 3M, Solventum and Whirlpool. The Motley Fool has a disclosure policy.
Why I Just Traded These Two Well-Known Dividend Stocks was originally published by The Motley Fool
