Buying these 3 beaten high-yield dividend stocks could be a genius move to boost your passive income

By | March 30, 2024

The S&P500 has risen no less than 31.4% compared to the past year. But many stable, dividend-paying companies have largely missed the growth-driven rally.

United Parcel Service (NYSE:UPS) And Chevron (NYSE:CVX) have lost value during that time Kinder Morgan (NYSE: KMI) is up less than 8%. The reason for investing in these dividend stocks is to generate stable passive income no matter what the market does, and not to try to outperform the S&P 500 in a short period of time.

Here’s why these Motley Fool contributors think all three dividend stocks have what it takes to keep increasing their payouts and rewarding shareholders.

A person smiles as he unloads packages from a conveyor belt in a warehouse.

Image source: Getty Images.

UPS thinks AI is more than okay

Scott Levine (UPS): UPS provided the market with financial targets for 2026 and suggested to investors this week that it will see growth over the next three years – a period during which the company expects to “drive higher productivity and efficiency,” according to CEO Carol Tome. However, investors were not happy with the news as Tome also stated that UPS is facing near-term headwinds.

However, this should not prevent forward-looking investors from picking up shares. While they should rightly be aware of how the company is dealing with current challenges, UPS is a leading supply chain company that has overcome challenges before, making it – and its profitable 4.5% dividend – currently is a smart choice.

One of the ways UPS will achieve productivity and efficiency improvements is by embracing artificial intelligence. For example, in 2023, UPS opened a new facility focused on AI and machine learning. The Kentucky-based warehouse, called UPS Velocity, has more than 700 mobile robots in use, and UPS expects to increase that number to 3,000 by the end of the year. Powered by AI and machine learning, the mobile robots and human workers currently move more than 350,000 packages throughout the 900,000-square-foot facility.

It’s not just in warehouses where UPS is harnessing the power of AI. The company has relied on AI to optimize delivery routes since 2012. According to UPS, “Orion recalculates individual package delivery routes throughout the day as traffic conditions, pickup commitments and delivery orders change.” By optimizing routes based on changing conditions, UPS can reduce both the number of miles drivers travel and the amount of fuel the vehicles must use – two factors that help the company reduce costs. From 2012 through 2020, UPS estimated that Orion helped the company save approximately 100 million miles and 10 million gallons of fuel annually.

An oil giant that yields 4.2%

Lee Samaha (Chevron): Warren Buffett bought Chevron stock this year, even though the stock price was disappointing. The stock is down slightly over the past year, compared to the S&P 500’s 31% gain, and oil prices are still above $80 a barrel.

One reason, which also explains why it underperforms its peers ExxonMobil, ConocoPhillipsAnd Western petroleum So far this year, there is uncertainty surrounding the proposed $60 billion acquisition Hess. Oil giants have started looking for energy assets because they generate a lot of money from the relatively high oil price. Meanwhile, the sector continues to fall out of favor among investors due to concerns about fossil fuel investments as the world transitions to clean energy solutions.

That said, there is still a hugely important role for oil in the global economy, and there is upward pressure on the price given OPEC and OPEC+ production cuts. Whoever wins the next election will have to replenish the massive drawdown in the US Strategic Petroleum Reserve implemented by the current administration in an effort to lower gasoline prices.

In addition, the International Energy Agency (IEA) has already raised its oil demand estimate four times since November.

If the oil bulls and Warren Buffett are right, Chevron, with or without Hess, will likely generate a lot of cash flow in the future, and that’s excellent news for investors looking for income.

Pipeline-driven passive income

Daniel Foelber (KinderMorgan): When the market is rising higher, it’s easy to overlook quality pipeline and energy infrastructure stocks like Kinder Morgan. After all, the growth prospects are limited.

Existing infrastructure could lose value if demand for oil and natural gas declines in the coming decades. But that is not the case at the moment. In fact, the world needs more energy.

Kinder Morgan is investing in infrastructure to support liquefied natural gas (LNG) exports. LNG is natural gas that has been cooled and condensed into liquid form for easier transport abroad.

Kinder Morgan’s projects require high initial costs, but generate stable cash flows thanks to long-term contracts. Kinder Morgan’s business is ideally suited as a low-growth company that returns cash to shareholders.

After cutting the dividend to $0.125 per share following the 2015 oil and gas crash, Kinder Morgan has since raised the dividend back to $0.2825 – yielding a yield of 6.3%. Kinder Morgan has consistently increased its dividend every year since 2018, and another modest increase is likely in the next quarter or two.

Kinder Morgan has impressively straightened out its balance sheet by paying down debt. To maintain a healthy balance sheet, Kinder Morgan must support its dividend with free cash flow so it doesn’t have to deplete its cash position or take on debt. Two useful metrics to compare are the FCF yield and the dividend yield.

KMI Free Cash Flow Yield ChartKMI Free Cash Flow Yield Chart

KMI Free Cash Flow Yield Chart

As you can see from the chart, Kinder Morgan’s FCF yield is higher than its dividend yield. The FCF return is just FCF per share divided by the share price. But more importantly, it tells us how much the dividend could be if Kinder Morgan paid out all of its free cash flow. The approximately four percentage point difference between the FCF yield and the dividend yield gives Kinder Morgan a nice margin of error. It indicates that the dividend is affordable and that there is room to increase the dividend in the future.

All things considered, Kinder Morgan is worth considering if you’re looking for an investment focused on passive income rather than potential capital gains.

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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no positions in the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chevron and Kinder Morgan. The Motley Fool recommends Occidental Petroleum and United Parcel Service. The Motley Fool has a disclosure policy.

Buying these 3 beaten high yield dividend stocks could be a genius move to boost your passive income. originally published by The Motley Fool

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