High-yield dividend stocks have been out of favor for two reasons. First, the 10-year Treasury rate is over 4%, which makes it difficult to get excited about a stalwart dividend stock yielding less than that. And second, the market has been going up -- a lot. Those capital gains are going to eclipse the dividend income from many companies. And that leaves high-yield dividend stocks on the sidelines of today's unstoppable market.
But long-term investors know that the secret to investing in quality dividend stocks isn't to beat the market in a particular year, but to collect passive income while also participating in the market. At its core, income investing is a hybrid strategy that should appeal to more risk-averse investors or those looking to collect income no matter what the market is doing.
Here's why United Parcel Service (UPS 0.14%), Target (TGT 0.18%), and American Electric Power (AEP -1.84%) are excellent high-yield dividend stocks to consider now.
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UPS' 4.4% dividend yield is compelling for income-seeking investors
Lee Samaha (UPS): The package delivery giant's 2023 was, in the words of CEO Carol Tome on the earnings call, "a difficult and disappointing year."
The company got hit with a combination of deteriorating end markets due to a weakening economy and the costly impact of protracted labor contract negotiations. The latter had a double impact on the company. First, customers diverted delivery volumes to rival networks, fearing strike action impacting UPS' network. Second, resolving the dispute resulted in higher costs due to the new contract.
The result was profit declines across all three segments: U.S. domestic package, international package, and supply chain solutions. On a headline basis, this year doesn't look much better, with management forecasting revenue to grow by just 1% to 3.9% and adjusted operating margin to decline from 10.9% to something in the 10% to 10.6% range.
That said, there's still a strong case for buying the stock, at least if you take on management's guidance for the second half of 2024 to be much better than the first. There are a few reasons, not least lapping the increased costs associated with the new labor contract and UPS gradually winning back lost customers. In addition, management is cutting 12,000 jobs, which should result in $1 billion in cost savings this year with "more cost-out to come as we have a full year benefit in 2025," according to Tome.
Meanwhile, UPS continues to gain ground within its targeted end markets, such as small and medium-sized businesses and healthcare. It also has efficiency-enhancing and ongoing investments in smart facilities and automation, which can improve profitability.
UPS' 4.4% dividend yield is an excellent reason to buy the stock, but it's not the only reason. If you can tolerate the potential for some near-term bad news in the first half, the company's earnings growth is set to pick up notably in the second half and beyond.
Target's turnaround is just beginning
Daniel Foelber (Target): The old saying that the stock market is forward-looking is a bit misleading. During a bear market, or when sentiment is negative, investors can get caught up in the present challenges and ignore future growth. Just look at what happened to Meta Platforms, Amazon, Nvidia, and countless other companies that have more than doubled from their 2022 lows.
But when sentiment is positive, it's usually because investors are willing to pay a higher price for a company today for what it could do in the future. That's playing out with Target right now, which has quietly surged over 32% in the last three months.
The stock posted its largest one-day gain in four years after reporting its Q3 earnings in mid-November. But Target has continued to rally not because it is doing particularly well right now, but because investors believe the worst is over and 2024 will be a period to build upon.
Target has done an excellent job reducing its inventory, which has allowed it to limit sales and boost margins. Target is still doing its standard promotions, and we'll hear more about the holiday quarter when the company reports in early March. But there's a big difference between promoting a theme and fire-selling goods because a company over-ordered and over-estimated consumer demand for discretionary goods. That's exactly what Target did after getting head faked by seemingly insatiable demand during the worst of the COVID-19 pandemic.
The key for Target isn't what happens now, but how it continues to adapt to changing and shifting consumer preferences. The company has made strides with e-commerce, curbside pickup, and its Target Circle loyalty program. Target will need to continue building out these tools to differentiate itself from other retailers and stand a better chance at protecting its margins during the next economic downturn.
Even after the stock's run-up, Target still features a 3.1% dividend yield and a mere 18.7 price-to-earnings (P/E) ratio. At the worst of the sell-off, the dividend yield was around 4% and the P/E ratio was under 15. Target isn't as much of a no-brainer buy as it was a few months ago. But it's still a good choice for passive income-minded investors looking for a quality brand.
Put American Electric Power and its high-yield dividend to work for you
Scott Levine (American Electric Power): UPS stock is a great way to grow your passive income, but the company's business could suffer from a downturn in the economy, and that may have conservative investors looking for another option. In this case, American Electric Power is a great alternative. The company lauds itself as the largest electric transmission provider and one of the largest distribution providers in the U.S. With a commitment to rewarding shareholders, American Electric Power and its 4.6% forward-yielding dividend represent a great opportunity for income investors.
Because it operates as a regulated utility, American Electric Power is able to charge rates that ensure it generates a profit. And since it's highly unlikely that the company's 5.6 million customers located in 11 states will decide to curb electric use to such an extent that the company's financials suffer, management has good foresight into future cash flows, helping the company allocate dividends in a financially prudent manner. From 2024 through 2028, for example, management forecasts generating $38.3 billion in cash from operations -- a period during which it expects to return $11.1 billion to shareholders in the form of dividends.
Naturally, a company's past performance is no guarantee that it will perform similarly in the future. Nonetheless, the company's 113-year history of consecutive quarterly dividend payments is a reassuring sign that rewarding shareholders is deeply woven into the company's culture. Investors can, therefore, be a little more confident of management's dividend target: 6% to 7% annual raises -- in line with the company's earnings -- through 2028.
For income investors, American Electric Power is a great choice to supercharge their passive income streams.
