When dividend-paying companies go on sale, their yields increase, which can make them juicy passive income opportunities. But a dividend is only as good as the company paying it; meaning if you're going to invest in a beaten-down dividend-paying company, it has to be able to overcome whatever challenges it is going through.
United Parcel Service (UPS 1.64%) and Devon Energy (DVN 0.09%) are far from firing on all cylinders, but both companies have what it takes to find their footing. Meanwhile, the stock of Kinder Morgan (KMI +0.64%) just hit an eight-year high and could still be a great value.
Here's what makes all three dividend stocks great buys now, according to these Motley Fool contributors.
Image source: Getty Images.
Heading in the right direction
Daniel Foelber (United Parcel Service): UPS has a 22.2 price-to-earnings ratio (P/E) and a dividend yield of 4.8%. So right off the bat, it stands out as an intriguing high-yield value stock. But when a well-known industry leader has a depressed valuation or inflated yield, it is usually for good reasons.
UPS has seen a significant reduction in its sales growth and profitability in the past couple of years. As you can see in the following chart, it enjoyed a surge in sales and margins during the pandemic, but now the business is arguably worse off than it was pre-pandemic. Past success means little to investors, who tend to care more about where a company is headed than where it has been.
Data by YCharts.
In March, UPS outlined a three-year plan to get back on course, with an emphasis on increasing delivery volumes in 2024 and operating margins in 2025 and 2026. It has made some progress on that plan, with higher delivery volumes in the second quarter, but it needs to sustain that momentum to impress investors.
The good news is that UPS remains highly committed to its dividend, although raises may be small for the foreseeable future until the company can show meaningful earnings growth, and thus justify a higher payout. But at a 4.8% yield, it is already offering income investors something to like, making it a worthwhile dividend stock to consider buying now.
NYSE: UPS
Key Data Points
Investors won't pay an arm and a leg to power their portfolios with this energy stock
Scott Levine (Devon Energy): For those looking to procure steady passive income, it can be incredibly exciting to find a compelling dividend stock.
But to find one sitting in the bargain bin? That's the icing on the cake -- and it's an opportunity that is available with Devon Energy, which offers a juicy forward dividend yield of 4.9%. Currently, shares of this leading oil stock trade at 3.8 times operating cash flow, representing a discount to the five-year average cash flow multiple of 4.
With shares of this upstream energy powerhouse down about 10% year to date, investors may suspect that there's something awry with the company -- especially with the S&P 500 rising about 23% during the same period.
NYSE: DVN
Key Data Points
But the greater catalyst for the stock's decline is probably the downward movement (albeit minor) in energy prices. West Texas Intermediate (WTI) crude, the U.S. oil benchmark, has dipped about 20% over the past year, and investors may speculate that a further decline is in the immediate future.
Although it's important to acknowledge the lower price of oil, it's also crucial to appreciate that energy prices both rise and fall. Devon Energy is a leading exploration and production company that has withstood energy price downturns before, and it will likely withstand future downturns as well.
Even with the price of WTI at $70 per barrel, for instance, Devon projects a free cash flow yield of 9% -- an auspicious sign considering management targets returning 70% of free cash flow to investors.
For further reassurance that this company is operating from a strong financial position -- and to hear updated guidance, which includes the recent Grayson Mill Energy acquisition -- investors should pay attention to its third-quarter earnings presentation on Nov. 5.
Natural gas will be part of the energy mix for decades to come
Lee Samaha (Kinder Morgan): It was easy to write off fossil fuels a few years ago, but the reality of volatile energy prices, geopolitical conflict, and the increasing cost and complexity of renewable energy mean the transition is going to take place at a slower pace than previously thought.
That's good news for the nuclear industry and for the natural gas industry. The new reality has sent stocks like gas turbine and services (and wind power) company GE Vernova soaring, alongside utilities with nuclear power capability, like Vistra.
It has also helped investors to realize the charms of Kinder Morgan, a specialist in natural gas pipelines and storage, liquefied natural gas (LNG) liquefaction, and LNG terminals.
NYSE: KMI
Key Data Points
Moreover, suppose the betting markets are right about the presidential election? If they are, there will be a new administration in the White House that could be much more favorable to expanding U.S. energy production, notably gas, even more than it already has over the past four years.
It speaks to a de-risking of the issue that Kinder Morgan investors would be most concerned about, namely the long-term future of natural gas/LNG as an energy source or export product. While the clean energy transition is taking place, it's clear that there's a significant role to play for gas as an energy source to support the intermittent nature of renewable energy.
And the transition will take place over multiple decades. As such, Kinder Morgan will likely generate income and dividends (currently yielding 4.7%) for investors for many years.
