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2 Wildly Undervalued Dividend Stocks to Buy in 2022

By Daniel Foelber – Jan 4, 2022 at 9:42AM

Key Points

  • Kinder Morgan has a nearly 7% dividend yield.
  • UPS embodies why Wall Street gives certain businesses a premium valuation.
  • Buying both stocks gives an investor a blend of value, income, and growth for 2022 and beyond.

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When it comes to generating passive income, reliability is more important than a high yield.

From 2019 to the end of 2021, the S&P 500 produced a 103% total return amid a slew of challenging events. To name a few: a global pandemic, 30-year-high inflation, and an impaired supply chain.

Turning the calendar to 2022, investors might be interested in pulling in the reins and shifting toward undervalued dividend stocks that generate passive income. Here's what makes Kinder Morgan (KMI 1.01%) and United Parcel Service (UPS 0.22%) two great options worth considering now.

Two smiling women working in a warehouse.

Image source: Getty Images.

A safe high-yield dividend stock

Kinder Morgan produced a 23.9% total return in 2021, which sounds good until you consider that it underperformed both the S&P 500 and the Energy Select Sector SPDR ETF (XLE 1.55%)

KMI Total Return Level Chart

KMI total return data by YCharts.

Kinder Morgan is one of the largest infrastructure companies in the U.S., commanding extensive natural gas, oil, and carbon dioxide pipeline networks as well as an energy storage business. Demand for its assets is tied to long-term contracts, which protect Kinder Morgan from oil and gas price volatility.

This resilience was put on display in 2020 when Kinder Morgan suffered only slight declines to its revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) while the rest of the oil and gas industry was brought to its knees. However, long-term contracts are a double-edged sword, as they've limited Kinder Morgan's ability to capture upside from rising oil and natural gas prices -- which are now around a seven-year high.

Kinder Morgan could be one of the most underappreciated dividend stocks on the market. Management has repeatedly said it's going to keep a lid on spending due to the uncertainty of long-term natural gas demand both domestically and through liquefied natural gas exports. The company's solution is to selectively build infrastructure and invest in alternative energy when needed. But mostly, it's all about maintaining its existing portfolio. That's music to dividend investors' ears because it means Kinder Morgan will have plenty of cash to pay and raise its dividend.

It is one of the few S&P 500 components with a dividend yield above 6%. Investors looking to supplement income in retirement or generate passive income from a company they can count on could consider Kinder Morgan for 2022 and beyond.

One of the best all-around companies on the market today

Unlike Kinder Morgan, which has been a market-underperforming stock, UPS closed 2021 within striking distance of an all-time high as its share price has more than doubled in the last two years. Yet a rising stock price isn't necessarily indicative of an expensive stock. Rather, there are many reasons UPS is still undervalued.

For starters, it is an incredibly efficient business. A little over five years ago, UPS and its main competitor, FedEx (FDX 0.28%), had around the same operating margin and generated similar cash from operations. Today, both companies earn around the same revenue. But UPS converts more of those sales into profit in large thanks to its efficient international segment, which routinely posts an operating margin of 20% or more.

UPS Revenue (TTM) Chart

UPS revenue (TTM) data by YCharts. TTM = trailing 12 months.

New investors may find it fascinating that the market will give drastically different valuations to an excellent business (UPS) versus just a good business (FedEx). UPS finished 2021 with a $186.3 billion market cap, the largest of any U.S. industrial stock. FedEx finished the year with a market cap of just $68.5 billion.

Could FedEx and UPS both be undervalued? Arguably so. But UPS has a better track record for executing in good times and bad. For example, it delivered good results throughout the 2018 U.S.-China trade war while FedEx struggled mightily. In fact, FedEx stock fell the day after reporting earnings between the third quarter of its fiscal year 2018 to the second quarter of its fiscal year 2020. FedEx's reputation for overpromising and underdelivering during any hint of hardship while UPS cruises along isn't a good look.

Even today, UPS has done a better job navigating the current supply chain and labor shortages. It indicated it was able to hire enough workers for the 2021 holiday season while FedEx said it was having trouble finding workers.

UPS' investments in e-commerce, expanded routes, growing healthcare and automotive businesses, and its targeted efforts toward small and medium-size businesses (as well as large businesses and residential customers) make for a complete package.

Two quality dividend stocks worth buying now

Kinder Morgan and UPS are two drastically different businesses. Kinder Morgan's 6.8% dividend yield alone is what many investors hope to earn in a year. Yet even the company acknowledges that its core business is in for stagnate or low long-term growth.

Meanwhile, UPS continues to post year after year of record results as the demand for better quantity and quality in package delivery rises among consumers and businesses. Buying equal parts of both Kinder Morgan and UPS would give investors an annual dividend yield of 4.4% while exposing their portfolios to a mix of value and growth from two industry-leading companies.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool owns and recommends FedEx and Kinder Morgan. The Motley Fool has a disclosure policy.

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