Passive income is an idea we can all get behind. Investing in high-yield dividend stocks is a way of letting your hard-earned savings work for you without having to sell a stock. It's passive income at its best. And United Parcel Service (UPS +0.63%), Southern Company (SO 1.06%), and Enbridge (ENB 0.82%) are three high-yield dividend stocks worth buying now.
By investing $5,000 in each stock, an investor can expect to receive more than $3,000 in dividend income over the span of four years. Here's why each company has what it takes to continue rewarding shareholders with dividends for decades to come.
Image source: Getty Images.
UPS faces considerable headwinds in 2023, but its dividend looks safe
Lee Samaha (UPS): There's little doubt that UPS will face challenging end markets in 2023. A slowing economy usually means less demand for parcel deliveries, and disruptive labor negotiations haven't helped, either.
Management started the year expecting full-year revenue of $97 billion to $99.4 billion, only to cut expectations to $97 billion in April, and then to $93 billion in August. Over that period, full-year adjusted operating margin expectations have been cut from a high of 13.6% to just 11.8% -- implying a cut in full-year adjusted operating expectations from $13.5 billion to $11 billion.
Could earnings expectations be cut more in 2023? I think the answer is yes. Interest rates continue to pressure consumer discretionary spending, China's recovery has been weaker than most expected, and the conflict in Europe continues.
Still, two things haven't changed for UPS. First, its capital allocation plans for a dividend payout of $5.4 billion and share repurchases of $3 billion. Second is management's commitment to investing in targeted markets such as small and medium-sized businesses and healthcare. In addition, UPS continues to invest in productivity-enhancing initiatives such as smart packaging facilities.
Those initiatives should increase profitability and margins when the market inflects, as history suggests it will. Meanwhile, investors can enjoy a sustainable 4% dividend yield while they wait for a recovery.
NYSE: UPS
Key Data Points
Put utility stock Southern Company to work for ample passive income
Scott Levine (Southern Company): Generating consistent cash flows from their indispensable businesses and frequently returning that capital to shareholders, utility stocks like Southern Company often form the foundations of income investors' portfolios. Southern Company, for example, generates about 87% of its operating revenue from its regulated businesses.
For 76 years, Southern Company has demonstrated a steadfast commitment to rewarding shareholders, either paying a dividend equal to or higher than that which it provided in the previous year. In the 21st century, however, Southern Company's dedication to the dividend is even clearer as the company has raised the payout in each of the past 22 consecutive years. The company's dividend seems to be a particularly powerful way to energize investors' portfolios, as it offers an attractive 4.1% forward yield.
After nearly 30 years, the United States has a new nuclear plant generating power for customers in Georgia: Vogtle Unit 3. Southern Company, a gas and electric utility primarily serving U.S. customers throughout the South, started operations at Vogtle Unit 3 in July, and it's not done yet. The company expects to expand its nuclear power portfolio and start operations at Vogtle Unit 4 in the coming months. These nuclear power assets are expected to provide carbon-free power for the next 60 to 80 years and is part of the company's initiative to achieve net zero greenhouse gas emissions by 2050.
NYSE: SO
Key Data Points
Keep an eye on Enbridge's balance sheet
Daniel Foelber (Enbridge): Enbridge is one of the largest pipeline and infrastructure asset operators in North America. It made headlines on Sept. 5 when it announced the $14 billion acquisition of three natural gas utilities from Dominion Energy (D 0.32%). The deal will boost the company's free cash flow and help support future dividend raises.
The bulk of Enbridge's business is tied to stable cash flows supported by long-term contracts. So Enbridge isn't all that affected by the ebbs and flows of oil and gas prices. Rather, the secret to a good pipeline operator is capital management by servicing existing assets well, paying attractive prices for acquisitions, and avoiding overreliance on debt.
Enbridge has been fairly aggressive with its acquisitions. And the not-so-cheap valuation it paid for Dominion's gas utility assets is a prime example. Its total long-term debt position and debt-to-capital ratio are now near five-year highs, and that's before factoring in the impact of the acquisition.
ENB Debt To Capital (Quarterly) data by YCharts
In its Sept. 5 investor presentation, Enbridge said that its long-term goal is to have a payout range of 60% to 70% of distributable cash flow, grow the business at 1% to 2% organically per year, and achieve overall annual growth of 5% or higher after the acquisition is buttoned up in 2025. Enbridge is walking a fine line given the state of its balance sheet and the fact that annual dividend obligations currently exceed free cash flow per share.
Enbridge has a 7.8% dividend yield. So if it can sustain the dividend, it would be an incredibly attractive dividend stock. The balance sheet isn't great and there's little room for dividend growth at this point. However, the company should be able to at least maintain the existing payout after it gets the free cash flow boost from the acquisition. And given how high the yield is, that is reason enough to own Enbridge stock.
