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Two Kiplinger Dividend 15 Picks Hit a Rough Patch

Giants 3M and ExxonMobil are on our watch list at the moment as lawsuits and sliding oil prices become potential hurdles to clear.

The past 12 months have been good ones for U.S. stocks, and the Kiplinger Dividend 15—our favorite dividend-paying stocks—have risen right alongside the broad market. Over the past year, the average return of the stocks on our list and that of Standard & Poor’s 500-stock index are an identical 21.7%. After the run-up, our list still sports a healthy 3.5% average dividend yield, compared with 1.9% for the S&P 500 and 1.5% for the 10-year Treasury note (prices, returns and other data are through January 31).

Alternative-asset manager Blackstone Group (symbol BX) was the runaway winner among our picks, having returned 26.2% since our last update, bringing its one-year total return to an eye-popping 86.9%. The firm saw a 21% boost in assets under management in 2019, to $571 billion. Blackstone pays a variable dividend and currently yields 4.0%. That’s well below it’s five-year average yield of 7.0%, but we doubt many investors who held the stock during the recent run are complaining.

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On our watch list. Shares of industrial giant 3M (MMM) plunged 17.9% over the past year and now sit 37% below their 2018 high. Cyclical slowdowns in the automotive and consumer electronics markets—both of which include major buyers of 3M’s products—have crimped earnings of late. 3M is restructuring and cutting costs in order to rebound strongly once these beaten-down markets bounce back, says Mairs & Power Balanced fund manager Kevin Earley. More concerning is that 3M is among the companies facing lawsuits surrounding the manufacture of chemical substances, used in products such as fire-retardant foams, that have allegedly contaminated water supplies. Earley figures that the litigation accounts for some $15 billion to $20 billion in lost market value for 3M since mid 2018.

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Whether ongoing legal battles and potential cleanup costs will prove more damaging to 3M (or its payout) remains to be seen, and we’ll keep a close eye on it. In the meantime, 3M still boasts a strong balance sheet and generates plenty of cash. The firm raised its payout 2% in February, marking its 61st annual dividend hike.

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Shares of ExxonMobil (XOM) shed 10.6% over the past 12 months as falling oil and natural gas prices have eaten into the firm’s earnings and cash flows. The energy behemoth is investing heavily in new operations that it expects will boost earnings a few years down the line, but more immediately, Exxon lacks sufficient free cash flow (cash profits left over after spending to maintain and expand the business) to cover its ample payout. Analyst Stewart Glickman at investment research firm CFRA expects Exxon to fund its dividend over the short term through debt and sales of non-core assets. The firm has historically maintained a clean balance sheet and diligently paid down debt, he says. It’s worth noting that the company continued to raise its dividend even as oil prices fell by more than 70% between mid 2014 and early 2016. Exxon hiked its payout by 6% last year; the shares yield 5.6%.

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