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Do you want $2,000 in passive income? Invest $15,000 in these five dividend stocks and wait four years

Generating passive income from quality dividend stocks doesn’t look as attractive as the S&P500 And Nasdaq Composite indexes reach new record highs. But the real value of dividend stocks is not how they perform against the market in the short term, but how their consistency can help with financial planning and collecting passive income, regardless of what the market does.

United Parcel Service (NYSE:UPS), Chevron (NYSE:CVX), ExxonMobil (NYSE:XOM), Goal (NYSE: TGT)And McDonald’s (NYSE:MCD) are five dividend stocks sold in the past three months. By investing $3,000 in each of these five stocks, you can expect more than $2,000 in cumulative dividend income over the next four years. Here’s why all five undervalued dividend stocks are worth buying right now.

A person holding a pen while looking at a laptop computer.

Image source: Getty Images.

This parcel delivery giant still has a long way to go to restore investor confidence

UPS is getting dangerously close to hitting a four-year low. Operating margins have fallen off a cliff as UPS looks to reduce costs and set realistic expectations for customer demand after severely overestimating the continued rise in small package delivery volumes.

UPS has laid out a new plan to restore margins and return to growth by 2026. Healthcare is an important part of this impulse. But UPS said it will rely on organic growth and acquisitions to boost the segment, putting pressure on the company’s ability to perform.

UPS is out of favor for good reasons, but it’s important to remember that the company operates in a cyclical industry. With a yield of 4.8% and a price-to-earnings (P/E) ratio of 19.4, UPS gives investors significant incentive to buy and hold the stock as it turns things around.

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Big oil and big capital return programs

It’s been a good period for integrated oil giants like Chevron and ExxonMobil, which have seen their stock prices soar from 15-year lows to all-time highs between 2020 and 2023. But both stocks have cooled off recently, remaining essentially flat in recent years. despite a strong rise in the broader market.

Chevron and Exxon are returning a lot of money to shareholders with buybacks and dividends. They have announced splashy mergers and acquisitions (M&A) as they look to boost cash flow to accelerate growth and implement their capital return programs.

Perhaps the biggest draw for both companies are their balance sheets. Leading up to the pandemic, Chevron was in a stronger financial position and had less leverage than Exxon. But Exxon has arguably benefited more from strong oil prices in recent years and has paid down a lot of debt. As a result, both companies are currently in great shape, with very low debt levels.

CVX Chart Net Total Long Term Debt (Quarterly).CVX Chart Net Total Long Term Debt (Quarterly).

CVX Chart Net Total Long Term Debt (Quarterly).

Both companies have strategies to generate high free cash flow and cover the dividend even if oil and gas prices fall to $50 per barrel.

Chevron yields 4.3%, better than ExxonMobil’s 3.5%. However, ExxonMobil has a clearer medium-term business plan. Rather than choosing between the two, it may be best to simply purchase a 50/50 split of both stocks.

Target turns slowly

Earlier this month, Target raised its dividend for the 53rd year in a row to a record high of $4.48 per share – representing a forward yield of 3.1%. That puts Target in an elite category of companies known as Dividend Kings – inclusive Procter & Gamble, Coca-Colaand numerous other loyal players who have increased their payouts for at least 50 years in a row.

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If you browse the list of Dividend Kings, you’ll find many consumer staples, utilities, and older industrial companies. So it’s particularly impressive that Target has been able to pay and grow its dividend for so long, given its discretionary product mix.

Target has recovered from its late October trough but is up just 6.5% over the past year, compared with a gain of more than 30% for its peer Walmart. Target also has a price-to-earnings ratio of 15.2 compared to Walmart’s 27.8 and a higher yield than Walmart’s 1.2%.

Target has already reduced inventory and expanded margins, but the recovery could accelerate if interest rates are cut and consumer spending improves. Either way, it’s a good long-term position thanks to Target’s quality dividend, valuation and strong brand.

McDonald’s addresses the elephant in the room

McDonald’s is down more than 15% year to date and is among the worst performers Dow Jones Industrial Average components so far this year. Like Target, McDonald’s hit a wall with price increases and faced bad press in response to price comparisons between now and before the pandemic.

To its credit, McDonald’s has addressed these claims, saying many of them are exaggerated or outright false and that price increases have not outpaced inflation. According to McDonald’s, input costs have increased by 40% over the past five years, causing prices to also increase by 40%.

The McDonald’s brand depends on value, convenience and taste. But value is perhaps the most important of all. McDonald’s is very aware of the need to slow/delay price increases and create value options to bring customers back in the door. Meanwhile, the stock has a price/earnings ratio of 21.3, a dividend yield of 2.7% and 47 consecutive years of dividends. is increasing – making it just a few years away from becoming a Dividend King.

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Ideal candidates for a passive income portfolio

UPS, Chevron, ExxonMobil, Target and McDonald’s may not be the most notable companies. But they pay reliable dividends, which could be compromised if share prices fall. This valuable feature is easy to forget when the major indexes soar to new heights. However, long-term investors know that dividends are an excellent way to generate predictable and stable income, which can be reinvested or supplemented with income in retirement.

All five companies have strong returns and cheap valuations, making them ideal choices for investors looking for bargains without sacrificing quality.

Should you invest €1,000 in United Parcel Service now?

Before purchasing shares in United Parcel Service, please consider the following:

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chevron, Target and Walmart. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.

Do you want $2,000 in passive income? Invest $15,000 in These 5 Dividend Stocks and Wait 4 Years was originally published by The Motley Fool

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