When the broader stock market indices are posting double-digit percentage gains for consecutive years, a mere 2% or 3% dividend yield may seem inconsequential. But when markets are under pressure and many stocks are falling, a steady stream of passive income can alleviate pressure on your portfolio.
United Parcel Service (UPS -1.51%), American Electric Power (AEP 0.95%), and Emerson Electric (EMR -0.14%) are three dividend stocks that look set to provide decades of passive income for your portfolio. Here's what makes each company a great buy now.
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A sizable yield from an excellent company
Daniel Foelber (United Parcel Service): Since Carol Tomé took the role of CEO of UPS in March 2020, the company has delivered everything investors could hope for. Market-beating returns, record earnings, strong growth, high margins, and the highest dividend raise in company history -- all the while being an inexpensive stock with a low price-to-earnings (P/E) ratio.
Yet UPS stock has been tumbling lately, and a lot of that has nothing to do with management's execution. Rather, the recent decline in UPS stock can be attributed to expectations of a downturn in the business cycle paired with a bleak outlook from rival FedEx (NYSE: FDX) that points to lower package-delivery volumes and a potentially weak holiday season.
It's worth mentioning that when UPS last reported earnings in late July, it was forecasting a record 2022. UPS has enough differences from FedEx that one company's troubles don't necessarily translate proportionally to the other, so it would be a mistake to assume FedEx's dire warnings mean UPS is going to slash its guidance. However, investors will get an update on the outlook for UPS when the company reports its third-quarter earnings in late October.
In the meantime, UPS remains at the top of its game. The company's trailing-12-month revenue exceeded $100 billion for the first time in history in its second-quarter report.
UPS Revenue (TTM) data by YCharts
Its trailing-12-month diluted earnings per share is up a staggering 205% in the last five years, while its trailing-12-month operating margin is at a 10-year high.
UPS is in a good position to handle any cooling off of the business. The company is generating plenty of free cash flow and earnings to support its dividend, which now yields 3.5%, as well as to buy back shares of its own stock. What's more, UPS' long-term investments through expanded routes and leaning into small and medium-sized businesses are focused on multiyear trends and not a single shift in the business cycle.
In my personal opinion, Tomé is one of the best CEOs of any Fortune 100 company. Companies with solid management teams have a habit of gaining market share when the industry is weak, and I would expect the same from UPS during any prolonged recession.
American Electric Power can charge up your passive income for years to come
Scott Levine (American Electric Power): Between the Fed raising interest rates, volatility in energy prices, and supply chain disruptions -- just to name a few -- there's no shortage of factors leading investors to worry about which direction the market is headed. While this may cause restless nights, there is some semblance of relief in the opportunity that stalwart dividend stocks, like American Electric Power, can provide. For 112 years, American Electric Power has paid quarterly dividends to investors. And while investors can never be guaranteed that companies will provide dividends in the future, American Electric Power's uninterrupted streak of rewarding shareholders since 1910 is a good indication that issuing dividends is embedded in the company culture.
The stock's meaty 3.2% forward dividend yield offers investors a conservative approach to boost their passive income streams for the long term, an opportunity that is certainly in high demand these days.
Operating in the regulated electricity market, American Electric Power may not have the power to arbitrarily raise rates when it sees fit, but the company retains the advantage of having clear insight into future cash flows. This, consequently, affords management the ability to plan accordingly for capital expenditures. Over the next five years, for example, the company plans on $38 billion in transmission and distribution investments to grow its portfolio of assets.
With regard to the dividend, American Electric Power has shown a steadfast dedication to rewarding shareholders. From 2010 to 2015, for example, American Electric Power raised its distribution at a compound annual growth rate (CAGR) of 5%. More recently, management has lifted the dividend at an even greater clip. Should the company achieve its 2022 target of returning $3.12 per share to investors, it will represent a 6% CAGR of its dividend from 2016 through 2022.
Fortunately for investors, today is a great time to "electrify" their portfolios with shares of American Electric Power. The stock is currently valued at 18.6 times earnings estimates, representing a discount to its five-year average forward-earnings multiple of 19.
Automation and climate control solutions are growth markets
Lee Samaha (Emerson Electric): Emerson Electric makes its money from a mix of automation solutions (processing of raw materials) and another segment called commercial and residential solutions, which contains a combination of heating, ventilation, air conditioning, and refrigeration solutions (HVACR) and professional and do-it-yourself (DIY) tools. Both segments have good growth prospects, and, as you can see below, this Dividend King has a very well-covered dividend.
Data by YCharts
Automation solutions will benefit from ongoing spending on power, energy, and chemicals. It's worth noting that despite the market's gloom and focus on slowing growth, energy prices remain relatively high and conducive to investment. Moreover, Emerson has a 55% share of industrial software company Aspen Technology (NASDAQ: AZPN), which sells into the same end markets. Emerson is is a beneficiary of the long-term trend toward HVACR in the emerging world combined with the need to retrofit buildings to meet emissions requirements in the developed world.
It all adds up to a company with solid long-term growth prospects and a well-covered dividend good enough to generate passive income for many years.
