2022 has been a turbulent year for the stock market so far. Many growth stocks are down 60% or more from their highs, and volatility has spilled over into the industrials and renewable energy sectors as well. Caterpillar ( CAT -1.43% )one of the world’s largest makers of equipment for the construction, oil and gas, and mining industries, is down nearly 20% from its all-time high while the company is active in renewable energy infrastructure Brookfield Renewable Partners (BEP -0.56% )(BEPC -0.49% ) is more than 30% below its peak.
Each of these companies has a growing business and passes a portion of its profits back to shareholders through a stable dividend. That makes them great dividend stocks to buy right now.
Caterpillar’s business is great
When looking at a stock that has fallen sharply from a high, it can be useful to turn back the clock and consider how the company and the stock market were performing at the time of the peak — in this case, June 4, 2021 .
Last June, the eagerly awaited passage of President Biden’s infrastructure bill would benefit companies like Caterpillar that sell earthmoving and construction equipment. There was also a widespread belief that the worst of the COVID-19 pandemic might be behind us. What followed were the waves of the Delta variant and the Omicron variant.
Last summer, businesses were optimistic that supply chain worries would soon subside and the general view was that rising prices around the world would be a temporary phenomenon. Today, annual inflation is 7.5% and the Federal Reserve is expected to start raising its benchmark fed fund rate as early as March.
Adding all of these changes together, it makes sense that Caterpillar stock is selling off in the near term. However, the company’s fundamentals show that its business has recovered well in 2021 and is well positioned for another great year in 2022.
Caterpillar delivered record-high net income in 2021 even though it generated less revenue — reflecting the fact that it’s expanding its profit margins despite higher raw material and shipping costs.
Caterpillar also brings in more than enough free cash flow to cover its dividend obligations, which means inflation could get worse and Caterpillar would still be able to support its payouts with cash. At the current share price, the dividend yield is 2.2%, and the company has increased its payouts for 27 straight years.
A well-rounded investment in renewable energy
Shares of Brookfield Renewable Partners are down 32% from their January 2021 high amid investor concerns about the rising cost of capital to finance renewable energy projects.
On the surface, the company’s recent results don’t look good. Its negative net income and negative free cash flow point to an unsustainable dividend. But look closer and you’ll see that Brookfield Renewable’s business is doing well.
Brookfield invests in renewable energy and decarbonizing infrastructure projects. These projects have a time horizon of several decades and inflation-resistant contracts. Therefore, a better metric to gauge the health of the company is funds from operations (FFO), which incorporates depreciation and other expenses into net income to give a more realistic representation of cash flow.
Brookfield’s 2021 FFO was $1.45 per unit, which was 10% higher than in 2020. That was enough cash to fund the 5% payout increase to $1.28 per unit — a dividend yield of 3.6% at current unit prices. With more than 15 gigawatts (GW) of capacity under construction and a development pipeline of over 62 GW, Brookfield is a long-term renewable energy investment that also offers a strong passive income stream.
Now two great purchases
Investors shouldn’t ignore the short-term challenges facing these companies — and their industries. The slowdown in economic growth will affect Caterpillar’s business. Increased competition in the renewable energy space coupled with rising interest rates will hurt Brookfield Renewable. None of these challenges, however, can dent the potential for each of these companies to grow in the decades to come.
Investing equal amounts of money in Caterpillar and Brookfield Renewable stocks would give an investor an average dividend yield of 2.9%. These payouts may help repay investors’ patience while they wait for the longer-term themes to overwhelm the short-term headwinds and send these stocks back higher.
This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are colourful! Challenging an investing thesis — including one of our own — helps us all think critically about investing and make decisions that help us be smarter, happier, and wealthier.