The dividend yield of the S&P 500 has decreased in recent years due to the dominance of growth stocks in the index and stock prices outpacing dividend growth rates. With the index now yielding just 1.3%, investors looking for stocks to boost their passive income stream may want to consider higher-yielding options.
Chevron (CVX 0.01%), United Parcel Service (UPS -0.20%), and the chemical specialist Dow (DOW -0.47%) yield 4.5%, 5.3%, and 7%, respectively, at the time of this writing. All three companies have sold off in recent months and are hovering around 52-week lows.
Here's why three Motley Fool contributors think the sell-off in these dividend stocks is a buying opportunity for patient investors.
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Chevron stands to improve its free cash flow with its acquisition of Hess
Scott Levine (Chevron): With the gift-giving season upon us, many investors are taking time off from their holiday shopping to tend to their financial goals for the coming year. For any of them dedicated to ramping up their passive income streams in 2025, Chevron warrants close consideration -- especially now.
Currently, the stock is sitting in the bargain bin, providing investors with a great opportunity to load up on shares along with their 4.5% forward dividend yield. It's a powerhouse when it comes to generating cash. For example, the company has consistently outperformed one of its closest peers, ExxonMobil (NYSE: XOM), over the past five years in generating free cash flow (FCF).
CVX free cash flow per share (annual), data by YCharts.
And Chevron can excel even further at generating FCF should it succeed in acquiring Hess (NYSE: HES), which seems even more likely now that the Federal Trade Commission has given the transaction the green light after completing an antitrust review. According to management, the acquisition will assist in growing revenue and FCF beyond the five-year production and FCF growth rates it had previously projected, extending it into the 2030s. With greater FCF, the company can continue hiking its dividend, as it has for more than 35 years.
Chevron had expected to complete the acquisition in the first half of 2024, but it's now facing an arbitration panel with ExxonMobil, which has raised objections to the deal. This has clearly spooked investors into thinking it is in jeopardy despite both parties remaining confident it will ultimately proceed.
Reflecting the market's skepticism, Chevron stock is now changing hands at 7.2 times operating cash flow, a discount to its five-year average cash flow multiple of 8.3. For those looking to strengthen their dividend income in the new year, the stock now provides a great option.
The key metrics are moving in the right direction for UPS
Lee Samaha (UPS): It's been a difficult period for United Parcel Service. An unexpected slowdown in package deliveries due to a weak economy and a costly labor dispute hit the company hard. As such, UPS spent most of the last couple of years battling elevated costs (partly associated with the new labor contract) and weakening delivery volumes.
These pressures have challenged UPS' business model emphasizing targeted, higher-margin deliveries rather than chasing volume growth. As such, the company appears to have taken on a higher quantity of lower-revenue-per-piece deliveries this year, hurting margins. Moreover, UPS has work to do to meet its full-year guidance this year.
That said, most key metrics are moving in the right direction, and the company is set for an earnings recovery in 2025. The increased costs associated with the labor contract are now in the numbers, making comparisons easier.
And UPS has cut capacity and 12,000 jobs to reduce costs and adjust to the market. Meanwhile, delivery volumes are growing again, and the overcapacity that dogged package delivery is being worked through.
At the same time, it continues to grow in its targeted end markets like small and medium-size businesses (SMBs) and healthcare, while investing in productivity-enhancing technology such as automation and smart warehouses.
All of this suggests UPS will at least maintain its dividend in 2025 as management prepares for a multi-year recovery, starting in 2025, when Wall Street expects a 17% improvement in earnings.
Dow is an industry-leading company with an ultra-high yield
Daniel Foelber (Dow): In the last two months, shares of commodity chemical giant Dow are down over 25% and were replaced by Sherwin-Williams in the Dow Jones Industrial Average. The stock hit a fresh four-year low on Thursday, the day after the Federal Reserve indicated the pace of its rate cuts could be slower than initially expected.
Dow and its peers are highly sensitive to interest rates. It is a capital-intensive business, so higher capital costs mean higher interest expenses. However, the more significant impact of extended higher rates could be a prolonged slowdown in global demand for Dow's products, especially in Europe and China. Business has been terrible in these markets for Dow, which has compressed its margins to razor-thin levels.
Since earnings are down, it doesn't look like a particularly cheap stock. However, evaluating cyclical companies based on trailing earnings can be a bad idea, since the valuation will look dirt cheap during periods of expansion and more expensive during downturns.
Analyst consensus estimates for 2025 earnings per share (EPS) sit at $3.21 compared to projections for $2.09 in 2024. However, those revisions could come down under the assumption that interest rates stay higher for longer. Dow's earnings have been all over the place in recent years -- with $8.38 in EPS in 2020 and less than a dollar in 2023.
Instead of getting too caught up in the near-term results, it's better to look at how the company is positioned to manage through the cycle and grow over time. Dow has a fairly strong balance sheet and an investment-grade credit rating. Since spinning off from DowDuPont in 2019, the company has kept its quarterly dividend at $0.70 per share, or $2.80 per year -- which has been a wise move given the turbulence across the industry.
Some investors may want to wait and see how management responds to the possibility of higher interest rates for a longer time before buying the stock. The company will report fourth-quarter and full-year 2024 earnings on Jan. 30, which will likely provide clearer insight into where it could be headed.
However, Dow has fallen so deep into the bargain bin that it's worth buying for investors with a long time horizon. The 7% yield makes it one of the highest-yielding stocks in the S&P 500, and provides a worthwhile incentive to hold it through what is sure to be another volatile year in 2025.
