Collecting dividends is one of the tried-and-true ways of outlasting stock market volatility. The benefits are threefold.

Not only do dividend stocks provide a steady stream of passive income no matter what the market is doing, but they also offer some peace of mind knowing that income is being produced from your investments without the need to sell equity.

What's more, dividend-paying companies that can support their payouts with earnings tend to be high-quality businesses with excess profits, giving them a margin of safety during challenging times.

United Parcel Service (UPS -0.20%), Air Products and Chemicals (APD 0.31%), and The Home Depot (HD 0.67%) have dividend yields of 3.54%, 2.46%, and 2.9%, respectively, averaging out to just about 3%. They stand out as three great stocks to buy now. These three Motley Fool contributors explain why.

A warehouse worker on a laptop surrounded by packages.

Image source: Getty Images.

A challenging year ahead for UPS, but the transformation continues

Lee Samaha (UPS): There's no point tiptoeing around the elephant in the room: This package delivery giant is set for a challenging year. A slowing economy usually means fewer deliveries.

Indeed, UPS management expects its domestic and international package volume to decline this year, and Wall Street analysts have revenue falling slightly in 2023 with earnings per share (EPS) declining from $12.94 in 2022 to $11.49 in 2023.

That said, that earnings estimate for 2023 puts UPS on a forward price-to-earnings (P/E) multiple of just 15.8 times earnings. That's a reasonable valuation for a company in a trough year. Moreover, it's an excellent valuation for a company with strong long-term growth prospects. 

The economy's ebb and flow is somewhat masking the underlying improvement in the company's business in recent years. An increased focus on growth markets like small and medium-size businesses (SMB) and healthcare has led to margin expansion and significant free cash flow.

It has also encouraged UPS to be more selective over its delivery contracts, and the company is improving the quality of its revenue as a consequence. It has led to a dynamic where UPS grows revenue and margins even when volume declines. 

All told, the transformation in its business mean UPS is set up to strongly grow earnings out of any slowdown/recession. As such, it's an excellent stock to pick up on any market-led weakness. 

Gas up your passive income stream with Air Products

Scott Levine (Air Products and Chemicals): Even during the best of times, smart income investors know that it's risky to simply chase high-yield dividend stocks. Instead, it's better to look for quality companies with track records of success in managing the growth of their business while rewarding investors.

Air Products, for example, has a long history of returning capital to investors: 41 years of consecutive annual dividend increases. An accomplishment of this sort doesn't come easily, and it deserves recognition. Should Air Products meet its guidance and return $7 per share to investors via the dividend, it will represent a compound annual growth rate in the payout of 10% from 2014 through 2023.

But the company's multi-decade history of hiking its dividend is only one reason Air Products is so alluring. The company's conservative approach to hiking its distribution also warrants recognition. It's unwilling to jeopardize its financial health to please investors with a high distribution, as shown by its average payout ratio of 60.9% over the past 10 years.

Investors will see that Air Products is not resting on its laurels. It has several growth projects under development that could provide the company with the ability to continue its streak of increasing its payout, such as massive hydrogen projects like its joint venture with AES in Texas and a green hydrogen project in Saudi Arabia.

And Air Products' long-standing businesses, like supplying semiconductor manufacturers with crucial industrial gases, should appeal to dividend investors.

Fix up your portfolio with Home Depot

Daniel Foelber (The Home Depot): The Home Depot is one of the most recognizable retail outlets in the U.S. And the Atlanta-based company also happens to be a long-term outperforming stock.

The business model might seem simple on the surface. But Home Depot's incredibly complex supply chain and diverse product and service offerings give it a wide moat that Lowe's Companies can only hope to rival.

Home Depot stock has been choppy over the last year and is currently hovering within striking distance of a 52-week low. The lower stock price, paired with year after year of dividend raises, has increased the yield to 2.9%. It's not as high as the 4% yield of a 10-year Treasury note, but it's a sizable source of passive income nonetheless.

In terms of valuation, Home Depot is at a decent price. Its P/E of 17.3 is well below its 10-year median. But its price to free cash flow (FCF) is above the 10-year median.

HD PE Ratio Chart

HD PE Ratio data by YCharts.

Still, Home Depot generates plenty more FCF than it needs to cover the dividend, a sign that the company can support future dividend raises with cash.

Home Depot is a component of the Dow Jones Industrial Average and is an incredibly powerful brand. Even so, the company's performance can be cyclical. Home Depot relies on both a healthy consumer and thriving industries across home improvement, construction, and other trades.

So it greatly benefits from a good economy, and is likewise hurt by a weak one. If the U.S. dips into a recession, expect Home Depot's performance to take a hit.

However, owning Home Depot over at least a three- to five-year period is still a great way to unlock passive income and be invested in a high-quality company.