Passive income may not be at the top of one's mind when the broader indexes are posting jaw-dropping gains. But dividend-paying companies can be a perfect fit for investors looking to help supplement income in retirement, or anyone searching for more value-focused stocks in 2025.
ExxonMobil (XOM -1.35%), United Parcel Service (UPS -0.43%), and American States Water (AWR -0.92%) are three industry-leading dividend stocks that have reasonable valuations. Investing $3,000 into each stock should help generate $288 in passive income in 2025, assuming all companies keep their payouts at least as high as last year.
Here's why each dividend stock stands out as a compelling buy now.
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Laying the runway for earnings and dividend growth
Daniel Foelber (ExxonMobil): Investors may be hesitant to associate oil and gas with reliable passive income, given the industry's cyclical nature. And while there are plenty of energy companies with track records of cutting their dividends or, at the very least, inconsistently raising their payouts, there are some standouts in the oil patch.
With 42 consecutive years of increasing its dividend and a 3.6% yield, ExxonMobil is one of the most attractive dividend stocks in the S&P 500. There are very few companies with both a long track record for annual increases and a yield above 3.5%. Best of all, ExxonMobil has what it takes to continue growing its business, whereas many Dividend Kings are stodgy, low-growth companies.
ExxonMobil updated its corporate plan in December, extending its free cash flow, earnings, capital return, capital investment, and other targets through 2030. The corporate plan is not just a means to inform investors of Exxon's plans, but it's also a way to hold the company accountable.
ExxonMobil is emphasizing cost reductions through efficiency improvements and a higher-quality oil and gas portfolio. Developments in the Permian Basin, offshore Guyana, and liquefied natural gas should help the company achieve these goals.
In the near term, ExxonMobil's stock price can ebb and flow based on what oil prices are doing. But longer term, the company is well positioned to continue outperforming the competition and take market share during downturns thanks to its outstanding balance sheet and continued investment in oil and gas, low-carbon fuels, and carbon capture and storage rather than divesting into renewable energy.
Before scooping up shares of ExxonMobil, it's worth understanding how the company approaches the energy transition compared to other energy majors. Investors looking for majors with a more balanced outlook on renewable energy may want to consider alternatives, whereas those looking for a strong oil and gas company with a growing dividend may gravitate toward ExxonMobil.
Best of all, ExxonMobil isn't an expensive stock, with just a 13.9 price-to-earnings (P/E) ratio and a 14.3 price-to-free cash flow ratio. Earnings may be strained in 2025 if oil prices fall due to growing global supply. But still, ExxonMobil's valuation provides a margin for error for earnings to decline and the valuation to still be reasonable.
Based on the current payout, a $3,000 investment in ExxonMobil should earn you $108 in passive income in 2025.
Add it all up, and ExxonMobil is an ultrareliable dividend stock to buy now.
UPS offers excellent yield and turnaround prospects, too
Lee Samaha (UPS): The package-delivery giant is far from perfect, but most of its key metrics are moving in the right direction, and its 5% dividend yield looks sustainable.
As previously discussed, following a disappointing 2023, UPS delivery volumes fell short of expectations last year, leading UPS to miss its initial full-year guidance.
As such, the U.S. small-package delivery market probably remains in a position of overcapacity. After the lockdown-driven boom in delivery volumes, UPS and others expanded capacity only to walk into a natural retraction in demand as the lockdowns ended and consumer/industrial spending slowed due to rising interest rates.
In response, UPS has had to adjust by cutting jobs and capacity to match demand. Management has done that, and it's also continued to focus on growing in targeted end markets like healthcare and small and medium-sized businesses, while investing in productivity-enhancing technology (automation, smart facilities, etc.).
The company demonstrated some progress in the third quarter of 2024, with U.S. delivery volumes and the spread between revenue per piece and cost per piece rising again. These factors improved profit margins.
If UPS can maintain that momentum in 2025, the stock has significant upside potential.
Trading on 15 times expected 2025 earnings, UPS looks like an excellent value stock to buy in 2025.
American States Water rules supreme among all Dividend Kings
Scott Levine (American States Water): Sure, amping up your passive income stream with a high-yield dividend stock is enticing. Still, there's something to be said for conservative dividend plays like American States Water.
The water utility stock currently offers a forward yield of 2.5%, and shares are currently sitting in the bargain bin. Changing hands at 17.1 times operating cash flow, American States Water stock is valued at a discount to their five-year average cash-flow multiple of 21.7.
Unlike the many businesses that can raise prices when they see fit, businesses that operate in regulated markets, like American States Water, must receive approval from public utility commissions before they raise rates on customers. While American States Water does provide water and wastewater treatment on U.S. military bases, it's the company's regulated business operations that provide the majority of its revenue and net income -- about 80% and 88%, respectively.
Although the company can't arbitrarily raise customer rates, it benefits from certain guaranteed rates of return through its regulated businesses. This, in turn, provides management with significant foresight into future cash flows, helping it to plan accordingly for capital expenditures such as dividends.
Hiking its dividend for 69 consecutive years, American States Water has the longest streak of raises among Dividend Kings -- an impressive feat that further speaks to the merits of American States Water as a conservative dividend stock. Navigating the turbulent waters that the business has undoubtedly encountered over the past seven decades -- and maintaining dividend hikes -- is no small accomplishment and deserves recognition.
And the dividend raises aren't nominal. With the 8.3% boost to the quarterly dividend that it announced in July 2024, the company has now raised its dividend at an 8.8% compound annual growth rate of 8.8% in its quarterly dividend rate since 2019.
