An investor has decided to replace a company known for cutting its dividend with another company that offers a more sustainable dividend. The investor enjoys investing in dividend stocks to see the income contribute to their portfolio, which allows them to reinvest into further income-generating investments. This strategy helps grow their passive income stream with the aim of eventually offsetting regular expenses.
The investor’s journey faced challenges whenever companies in their portfolio reduced their dividends. One particularly disappointing investment was in 3M, an industrial leader with a longstanding history of over 60 consecutive years of increasing dividends. However, 3M cut its dividend earlier this year, prompting the investor to sell their stake. The proceeds from this sale were partly used to invest in Whirlpool, adding it to their income portfolio due to its more sustainable dividend offering.
3M had been a reliable dividend stock, achieving a reputation as a Dividend King due to its over half-century record of dividend growth. However, a series of costly legal issues forced the company to make difficult decisions, including the reduction of its dividend by about 50%. These legal challenges arose from a couple of 3M’s products, leading to settlements amounting to approximately $18.5 billion. To maintain financial flexibility for these settlements and other capital needs, 3M implemented several strategic moves, including spinning off its healthcare unit as Solventum, which was burdened with debt to enhance 3M’s financial status. Unfortunately, the spinoff took away a significant portion of 3M’s cash flow.
The investor initially chose 3M for its quality and steadily increasing dividend payout. Though 3M upheld this growth for many years, the legal issues became too burdensome to sustain such payouts. Consequently, the investor decided to divest from 3M and also from Solventum, as the latter has no current plans to issue dividends due to its ongoing debt repayment obligations.
The investor then allocated funds from the sale of 3M and Solventum to purchase shares in Whirlpool. This well-known appliance manufacturer had been of interest for some time, especially as the investor and their spouse recently purchased a new home requiring new appliances, several of which would be from Whirlpool. The company offers an attractive dividend, currently yielding nearly 7%, supported by a history of about 70 years of dividend payments, although not having increased it annually, Whirlpool has never cut its dividend.
Learning from 3M’s experience, the investor recognizes that a solid dividend history does not guarantee future performance. Nevertheless, Whirlpool appears well-positioned to maintain its dividend despite existing market challenges. The dividend expenditure for this year is about $400 million, comfortably covered by its projected free cash flow of around $500 million. Whirlpool’s strategy to bolster free cash flow includes selling some international assets and reducing its global cost structure. Efforts to lower debt are expected to cut interest expenses as well. As the housing market recovers with falling interest rates, Whirlpool anticipates increased sales from homeowners upgrading their appliances, thus strengthening its financial base and supporting sustained dividend payouts.
The investor experienced significant disappointment with 3M’s dividend reduction given its robust historical growth, prompting the divestment in favor of Whirlpool. Whirlpool’s higher-yielding dividend is anticipated to be more secure through current housing market challenges. While short-term headwinds may limit dividend increases, the investor believes that Whirlpool will prove to be a solid income stock in the long term, continuously contributing earnings to their portfolio.
