When dividend-paying companies go up for sale, their yields rise, opening up juicy passive income opportunities. But a dividend is only as good as the company paying it; This means that if you are going to invest in an abandoned dividend-paying company, it must be able to overcome whatever challenges it faces.
United Parcel Service(NYSE:UPS) And Devon Energy(NYSE: DVN) are not yet firing on all cylinders, but both companies have everything they need to find their feet. In the meantime, the stock is out Kinder Morgan(NYSE: KMI) has just reached an eight-year high and could still be of great value.
Here’s what makes all three dividend stocks great buys right now, according to these Motley Fool contributors.
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Daniel Foelber (United Parcel Service): UPS has a price-to-earnings ratio (P/E) of 22.2 and a dividend yield of 4.8%. It immediately stands out as an intriguing share with a high interest rate. But if a well-known market leader has a low valuation or too high a return, there is usually a good reason for it.
UPS has seen a significant reduction in revenue growth and profitability in recent years. As you can see in the following chart, the company saw a surge in revenue and margins during the pandemic, but now the company is arguably worse off than it was before the pandemic. Past success means little to investors, who are typically more concerned about where a company is going than where it has gone.
UPS Sales Chart (TTM).
In March, UPS outlined a three-year plan to get back on track, focusing on increasing delivery volumes in 2024 and operating margins in 2025 and 2026. UPS has made some progress on that plan, with higher delivery volumes in the second quarter. , but it needs to keep that momentum going to impress investors.
The good news is that UPS remains very committed to its dividend, although increases may be small in the near future until the company can show meaningful earnings growth to justify a higher payout. But with a yield of 4.8%, it already offers income investors something to like, making it a worthwhile dividend stock to consider buying now.
Scott Levine (Devon Energy): For those looking for stable passive income, finding an attractive dividend stock can be incredibly exciting.
But to find one in the bargain bin? That’s the icing on the cake – and it’s an opportunity available with Devon Energy, which offers a juicy 4.9% dividend yield. Currently, shares of this leading oil stock trade at 3.8 times operating cash flow, which represents a discount to its five-year average cash flow multiple of 4.
With shares of this upstream energy powerhouse down about 10% so far this year, investors may suspect something is wrong with the company, especially the S&P500 increased by approximately 23% over the same period.
But the bigger catalyst for stocks’ decline is likely the downward move (albeit small) in energy prices. West Texas Intermediate (WTI) crude, the U.S. oil benchmark, has fallen about 20% over the past year, and investors may speculate that a further decline will occur in the near future.
While it is important to recognize the lower oil price, it is also critical to realize that energy prices go up as well as down. Devon Energy is a leading exploration and production company that has weathered a decline in energy prices before, and is likely to do so in the future.
Even with WTI priced at, say, $70 per barrel, Devon expects a free cash flow yield of 9% – a promising sign given management’s goals of returning 70% of free cash flow to investors.
For further reassurance that this company is operating from a strong financial position – and to hear updated guidance, including the recent acquisition of Grayson Mill Energy – investors should pay attention to the third quarter earnings presentation on November 5.
Lee Samaha(KinderMorgan): A few years ago it was easy to write off fossil fuels, but the reality of volatile energy prices, geopolitical conflicts and the increasing cost and complexity of renewable energy mean the transition will occur at a slower pace than previously thought.
That is good news for the nuclear industry and for the natural gas industry. The new reality has sent stocks such as gas turbine and service companies (and wind energy) to the sidelines GE Vernova rising, in addition to utilities with nuclear power capabilities, such as Vistra.
It has also helped investors realize the charms of Kinder Morgan, a specialist in natural gas pipelines and storage, natural gas liquefaction (LNG) and LNG terminals.
Furthermore, what if the betting markets are right about the presidential election? If so, there will be a new administration in the White House that could be far more favorable to expanding U.S. energy production, especially gas, even more than it has done over the past four years.
It speaks to de-risking the issue that Kinder Morgan investors would be most concerned about, which is the long-term future of natural gas/LNG as an energy source or export. As the transition to clean energy takes place, it is clear that there is an important role for gas as an energy source to support the intermittent nature of renewable energy.
And the transition will take place over several decades. As such, Kinder Morgan will likely continue to generate income and dividends (currently 4.7%) for investors for many years to come.
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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 and recommends positions in Kinder Morgan. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
3 Great Dividend Stocks That Are Too Cheap to Ignore was originally published by The Motley Fool
