I would replace dividend cutters with companies that pay more sustainable dividends.
I enjoy investing in dividend stocks. I like seeing the income flow into my portfolio. You’ll have more money to reinvest in income-producing investments. It increases my passive income stream towards the end goal of eventually reaching a level where it can offset my regular expenses.
I’ve had several setbacks in achieving this goal over the years as companies I’ve owned have cut their dividends. One disappointing investment is 3M (MMM -0.40%). The industrial giant cut its payout earlier this year, ending a streak of more than 60 years of dividend increases. This cut led me to sell my shares. I used some of that cash to start a new position and add Whirlpool (WHR 2.34%) to my income portfolio. Here’s why I made that switch:
abdication of the throne
3M has always been one of the most reliable dividend stocks. With a history of increasing dividends for more than half a century, the company ranks among an elite group of Dividend Kings. But a series of problems forced the industrial giant to make difficult decisions, including cutting its dividend.
Several of the company’s products have led to very expensive legal issues. Ultimately, it agreed to pay approximately $18.5 billion to resolve 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 financial flexibility to cover these payments and other capital needs.
One of its moves was to spin off its healthcare division and form Solventum. 3M loaded its entities with debt to increase its financial flexibility. However, the downside of this spinoff was the loss of a large portion of 3M’s cash flow. As a result, the company reset its dividend after the spin, reducing it by about 50%.
3M’s dividend was a big reason I first invested in the company several years ago. I was looking for high quality, steadily increasing dividends. 3M achieved steady growth over the years, but legal issues proved too much to sustain the dividend any longer. Since the dividend has become obsolete, I decided it was time to sell 3M. I also sold my Solventum stock. That’s because the company has no plans to start paying dividends right away, as it needs to pay off some of the debt 3M had before the spinoff.
This dividend stock almost reaches its goal
I used some of the proceeds from the sale of 3M/Solventum to purchase Whirlpool stock. This iconic consumer electronics company has been on my radar for a while, and not just because it pays a dividend. My wife and I recently purchased a new home and had to purchase some new appliances along with it. Whirlpool makes many of the appliances we buy.
While researching home appliances, I began to take a closer look at inventory. The first thing I noticed is that it pays a very attractive dividend (current yield is close to 7%). The company has been paying dividends for about 70 years. Although the company has not increased its dividend every year (the last time it increased it was in 2022), it has never reduced its dividend.
WHR Dividend Data by YCharts
Now, as I learned from 3M (and other companies), even a strong historical dividend track record is no guarantee that the company will be able to achieve similar success in the future. However, Whirlpool is well-positioned to maintain its dividend despite current headwinds. This year’s dividend will cost about $400 million, but it’s easily covered by free cash flow (estimated at about $500 million after capital expenditures). Whirlpool is looking to increase 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. It is also working to reduce debt, which should reduce interest expenses.
Meanwhile, the company expects the housing market to recover eventually as interest rates fall. This should increase sales as home sellers upgrade appliances to appeal to more buyers and new homeowners purchase new homes after moving. I guarantee this. My wife and I disliked the refrigerator in our new home (not a Whirlpool) so much that we plan to buy a new one. This turnover cycle should improve Whirlpool’s sales and earnings, and give its dividend an even stronger foundation.
generate large amounts of income
Given 3M’s long history of steady growth, 3M’s dividend cut was extremely disappointing. That’s why I recently sold my shares to make way for Whirlpool. The company pays a much higher yield in dividends, which should be sustainable during the current housing market downturn. While it still faces some headwinds that will prevent dividend growth in the short term, I think it will be a solid income stock in the long term as it spins out cash into my account.
