The S&P 500 is up a whopping 31.4% over the last year. But many stable, dividend-paying companies have largely missed out on the growth-fueled rally.
United Parcel Service (UPS +0.68%) and Chevron (CVX 0.48%) have lost value over that time, while Kinder Morgan (KMI 0.35%) is up less than 8%. The rationale for investing in these dividend stocks is to generate stable passive income no matter what the market is doing, not trying to outperform the S&P 500 over a short period of time.
Here's why these Motley Fool contributors think all three dividend stocks have what it takes to continue raising their payouts and rewarding shareholders.
Image source: Getty Images.
UPS thinks AI is more than OK
Scott Levine (UPS): Providing the market with 2026 financial targets, UPS suggested to investors this week that it sees growth over the next three years -- a period during which the company expects to "drive higher productivity and efficiency," according to its CEO, Carol Tome. However, investors didn't take kindly to the news as Tome also stated that UPS is battling near-term headwinds.
However, this shouldn't preclude forward-looking investors from picking up shares. Although they should rightly be mindful of how the company handles the current challenges, UPS is a leading supply chain company that has overcome challenges before, making it -- and its forward-yielding 4.5% dividend -- a smart pick right now.
One of the ways that UPS will achieve productivity and efficiency increases is through its embracing of artificial intelligence. In 2023, for example, UPS opened a new facility where AI and machine learning have taken center stage. Dubbed UPS Velocity, the Kentucky-based warehouse has more than 700 mobile robots in operation, and UPS expects to increase this to 3,000 by the end of the year. Powered by AI and machine learning, the mobile robots and human employees currently move more than 350,000 packages through the 900,000 square-foot facility.
It's not only in warehouses where UPS is leveraging the power of AI. The company has relied on AI since 2012 for optimizing delivery routes. According to UPS, Orion "recalculates individual package delivery routes throughout the day as traffic conditions, pickup commitments, and delivery orders change." By optimizing routes based on changing conditions, UPS can reduce both the number of miles that drivers travel and the amount of fuel that the vehicles must use -- two factors that help the company to reduce costs. From 2012 through 2020, UPS estimated that Orion had helped the company to achieve annual savings of approximately 100 million miles and 10 million gallons of fuel.
NYSE: UPS
Key Data Points
An oil major yielding 4.2%
Lee Samaha (Chevron): Warren Buffett bought Chevron stock this year even though the stock price was disappointing. The stock is slightly down over the last year, compared to the S&P 500's 31% rise, and the price of oil is still above $80 a barrel.
One reason, which also explains why it's underperformed peers like ExxonMobil, ConocoPhillips, and Occidental Petroleum so far this year, is the uncertainty around its intended $60 billion acquisition of Hess. Oil majors have been looking to acquire energy assets as they generate bundles of cash from a relatively high price of oil. Meanwhile, the sector continues to fall out of favor among investors due to concerns about investing in fossil fuels as the world transitions to clean energy solutions.
That said, there's still a hugely important role for oil in the global economy, and there's upward pressure on the price given OPEC and OPEC+ production cuts. Whoever wins the next election is going to have to replenish the massive drawdown in the U.S. Strategic Petroleum Reserve carried out by the current administration in an attempt to lower gasoline prices.
In addition, the International Energy Agency (IEA) has already raised its oil-demand estimate four times since November.
If the oil bulls and Warren Buffett are correct, then Chevron, with or without Hess, is likely to generate bundles of cash flow in the future, and that's excellent news for income-seeking investors.
NYSE: CVX
Key Data Points
Pipeline-powered passive income
Daniel Foelber (Kinder Morgan): When the market is roaring higher, it's easy to overlook quality pipeline and energy-infrastructure stocks like Kinder Morgan. After all, the growth prospects are limited.
Existing infrastructure could lose value if oil and natural gas demand falls over the next few decades. But that's not the case right now. In fact, the world needs more energy.
Kinder Morgan is investing in infrastructure to support the export of liquefied natural gas (LNG). LNG is natural gas that has been cooled and condensed into liquid form for easier transport overseas.
Kinder Morgan's projects require high up-front costs but produce stable cash flows thanks to long-term contracts. Kinder Morgan's business is ideally suited as a low-growth company that returns cash to shareholders.
After cutting its dividend to $0.125 a share after the 2015 oil and gas crash, Kinder Morgan has since raised its dividend back up to $0.2825 -- presenting a yield of 6.3%. Kinder Morgan has consistently raised its dividend every year since 2018, and there will probably be another moderate raise in the next quarter or two.
Kinder Morgan has done an impressive job restoring order to its balance sheet by paying down debt. To sustain a healthy balance sheet, Kinder Morgan must support the dividend with free cash flow so it doesn't have to deplete its cash position or take on debt. Two useful metrics to compare are its FCF yield and its dividend yield.
KMI Free Cash Flow Yield data by YCharts.
As you can see in the chart, Kinder Morgan's FCF yield is higher than its dividend yield. FCF yield is just FCF per share divided by the share price. But more importantly, it tells us how much the dividend could be if Kinder Morgan paid out all of its FCF. The four percentage point or so difference between the FCF yield and the dividend yield gives Kinder Morgan a nice margin for error. It indicates its dividend is affordable and there is room to raise the dividend in the future.
All told, Kinder Morgan is worth considering if you're looking for an investment centered around passive income rather than potential capital gains.
