Want $1,000 in Passive Income? Invest $10,000 In This Dividend Aristocrat And Wait 3 Years

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Consumer staples giant’s share price Clorox (NYSE: CLX) hover around a three-year low after the company reported worse-than-expected quarterly results and cut its guidance earlier this month. A silver lining from the sale of Clorox shares is that its dividend yield is now 3.3%, the highest in seven years.

Clorox stock may continue to fall in the near term. But there are reasons why it could be a good stream of passive income for long-term investors.

Image source: Getty Images.

Clorox’s fall from grace

Clorox’s stock price hit an all-time high in August 2020 as the company could not produce enough cleaning products to meet customer demand. Clorox has since struggled to match its peak pandemic performance – posting disappointing results quarter after quarter. The worst news came a few weeks ago when Clorox reported disappointing results for the second quarter of fiscal 2022. Note that Clorox’s fiscal year ends June 30.

The company cut its full-year guidance, reported a much lower gross margin and said commodity and transportation spend would be closer to $500 million for the year instead of previous projections. which provided for 350 million dollars. Clorox’s gross margin tends to fluctuate in the low to mid 40% range. For the second quarter of fiscal 2022, it was 33%, a 21-year low.

CLX Gross Profit Margin Chart (Quarterly)

CLX Gross Profit Margin Data (Quarterly) by YCharts

There’s no way to water it down: Clorox had a terrible quarter and is on track for a disappointing year. The company has been less effective than its competitors in passing on higher costs to consumers. During its second-quarter fiscal 2022 conference call, Clorox said it could take at least 12 to 18 months for its gross margin to rebound back into its normal range, which doesn’t give investors much to look forward to. expect in the medium term.

A turnaround game in preparation

Given the poor results and lackluster forecast, investors may be wondering why Clorox is a good dividend-paying stock to buy now. For me, the investment thesis is simple. If you think Clorox will restore gross margin and earnings to pre-pandemic levels in, say, two years, then the stock looks like a fair price right now.

Clorox earned a record $7.36 diluted earnings per share (EPS) in fiscal year 2020. That was an outlier, so let’s look at $6.32 for fiscal year 2019. Clorox stock is currently around $140 per share. Earning $6.32 in diluted EPS in a few years would give it a price-to-earnings ratio of around 22, which isn’t cheap. But we also assume that Clorox’s business shows zero growth between fiscal year 2019 and fiscal year 2024.

Get paid to wait with a huge dividend

Long-term dividend investors care less about where a company is in the next two years and more about its ability to pay and grow its dividend over time while growing the business. Clorox has weathered inflation before and should be able to do so again. Its results may look ugly for a while, but if Clorox stock languishes, it could start to look cheap if it increases revenue and rebounds its margins.

Clorox isn’t going away anytime soon. It has a strong portfolio of consumer staple brands across a variety of product categories. More importantly, Clorox should have no trouble increasing its dividend even in these difficult times.

Chances are that Clorox’s free cash flow will be insufficient to sustain the dividend in the near term. However, the company has enough cash to pay the dividend. Financing a dividend with debt or by depleting balance sheet cash is not a sustainable solution. But Clorox knows the dividend is one of the main reasons investors hold its stock.

Clorox has paid and increased its dividend for 45 consecutive years, making it a dividend aristocrat. A dividend aristocrat is a S&P500 component that has paid and increased its dividend each year for at least 25 consecutive years. Remember that Clorox increased its dividend during periods of high inflation in the early 1980s, not to mention a few stock market crashes. Given this track record, investors can take comfort in knowing that Clorox’s dividend is safe and it would take a black swan event far worse than anything we’re currently experiencing for the company’s dividend to end up on the block.

Close your eyes and wake up in three years

Investing $10,000 in Clorox stock and waiting three years should earn you $1,000 in dividend income, plus you’ll buy a reliable company for what could turn out to be a great price assuming Clorox regains its footing. Clorox is not the kind of investment that will produce overwhelming results in the market. But it’s a solid way to generate passive income from a business that should be around for decades.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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