3 Monster Dividend Stocks to Buy Before the New Year

2023 has been a banner year for the stock market, particularly for megacap growth stocks. But many passive income investors may feel like they've missed out on the epic rally.

High-yield sectors, such as energy and utilities, have underperformed the major indices. But there's reason to believe the underperformance presents a buying opportunity for patient investors.

ExxonMobil (XOM -0.01%), Kinder Morgan (KMI -0.26%), and American Electric Power (AEP 0.49%) are all down year to date. Here's why each dividend stock looks like a compelling value and reliable source of dividend income.

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ExxonMobil blends growth potential with a rock-solid dividend

Daniel Foelber (ExxonMobil): Exxon is down about 10% year to date after having an epic market-crushing performance in 2021 and 2022. The sell-off may be a buying opportunity.

Exxon deserves a lot of credit for sticking with a plan that, not long ago, was loathed by Wall Street. When the industry was getting crushed in 2020, it was popular to cut oil and gas spending and diversify into renewable energy.

Exxon has consistently been against drastic investments in renewable energy, choosing instead to stay within its core competency of manipulating the hydrocarbon chain. That position worked against Exxon in the past. But going forward, it may prove to be the right long-term move.

Exxon has been a leader in carbon capture and storage and reducing carbon dioxide and methane emissions from its oil and gas operations. Exxon understands that oil and gas has to become a cleaner industry if it will play a role in the energy transition. So its approach isn't to divest out of the industry but rather make it as sustainable as possible. Geopolitical tensions have reminded markets of the importance of energy security and a proven solution like oil and gas.

Exxon's decision to bet big on fossil fuels was made all the more apparent with its announcement to buy Pioneer Natural Resources. The merger will boost Exxon's cash flow, lower operating costs, and could be a net positive for Exxon, especially since its balance sheet is strong enough to handle the merger.

Exxon expects to double its earnings by 2027 based on Brent crude oil (the international benchmark) averaging $60 a barrel, but $60 is less than Brent crude's current price of around $75 a barrel. And it is reasonable when looking at the last decade of Brent averages.

Data source: U.S. Energy Information Administration.

Exxon's plan also includes dividend raises, $20 billion in emissions reduction efforts, $20 billion per year in share repurchases over the near term, and plenty of cost savings.

In sum, Exxon can do very well even in a mediocre oil market. Investors with a three- to five-year time horizon should consider Exxon and its 3.8% dividend yield.

Kinder Morgan just raised its dividend expectations

Lee Samaha (Kinder Morgan): It's not difficult to see the attraction of the North American energy infrastructure's dividend. A 6.5% dividend yield is eye-catching. Management recently told investors it expects to grow its distributable cash flow by 5% in 2024 and its dividend per share by 2% to $1.15, putting its yearly dividend yield at slightly above 6.5% based on the current price.

However, investors will always want to know how sustainable the dividend payout is. Given that the gas pipeline and storage company has 61% of its cash flows coming from a "take-or-pay" (it is paid regardless of throughput) basis and 26% on a "fee-based" basis (a fixed fee irrespective of commodity prices), it's reasonable to assume the near-term answer to the dividend question is positive.

The longer-term answer is one all investors must consider because the future role of natural gas in the economy is open to debate, given the growth of renewable energy as a fuel source. Still, events of recent years and the growing cost of renewable energy projects have highlighted the attractiveness of gas, not just as a transition fuel but as a destination fuel for the clean energy transition.

In reality, renewable energy is an intermittent energy source and will not be a viable option in many parts of the world, including the U.S. As such, gas could play a much more critical role in supporting energy needs than many think. That would be great news for pipeline and storage companies like Kinder Morgan.

Put a jolt in your passive income with American Electric Power

Scott Levine (American Electric Power): They may not have the razzle of disruptive tech companies or the dazzle of innovative healthcare companies. However, utilities are widely recognized as reliable businesses that provide consistent passive income.

American Electric Power, for example, is a leading electric utility committed to simultaneously rewarding shareholders with a growing dividend and maintaining the company's financial well-being. For those looking to scare up some passive income with a monster dividend stock, American Electric Power -- and its forward-yielding 4.4% dividend -- is a great choice.

Tracing its history back to 1906, American Electric Power has grown to be one of the largest electric utilities in the United States, providing electric service to about 5.6 million customers. Its portfolio of assets includes an electricity transmission network that spans over 40,000 miles and an electricity distribution system that covers more than 225,000 miles. Because the company operates in regulated markets, it benefits from generating predictable revenues and earnings -- capital it generously returns to shareholders.

Over the past 10 years, American Electric Power has hiked its dividend at a compound annual growth rate of 5.6%, and it expects to continue doing so at a similar pace in the coming years. In the company's third-quarter 2023 earnings presentation, management reiterated its plan to increase the payout at a rate consistent with annual operating earnings growth, forecasted to be 6% to 7%.

Illustrating its desire to maintain its financial fortitude, management has also targeted a conservative payout ratio of 60% to 70% -- a goal that seems well within reach. For the past five years, the company has averaged a payout ratio of 67%.