Investing in 3 Undervalued High-Yield Dividend Stocks May Increase Your Passive Income

Investing in 3 Undervalued High-Yield Dividend Stocks May Increase Your Passive Income

THE S&P500 is up 31.4% compared to last year. But many stable dividend-paying companies have largely missed the growth-fueled recovery.

United Parcel Service (NYSE:UPS) And Chevron (NYSE: CVX) have lost value over time, while Children Morgane (NYSE:KMI) is up less than 8%. The reason to invest in these dividend stocks is to generate stable passive income regardless of market performance, not to try 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 to increase their payouts and reward their shareholders.

Investing in 3 Undervalued High-Yield Dividend Stocks May Increase Your Passive Income

Image source: Getty Images.

UPS thinks AI is more than acceptable

Scott Levine (UPS): In providing the market with financial targets for 2026, UPS suggested to investors this week that it expects growth over the next three years – a period in which the company hopes to “increase productivity and efficiency”, according to its CEO, Carol Tome. However, investors I didn’t like the news As Tome also said UPS is struggling with near-term headwinds.

However, this shouldn’t stop forward-looking investors from buying shares. While they should rightly be paying attention to how the company handles current challenges, UPS is a leading supply chain company that has overcome challenges before, making it, as well as its forecast dividend of 4.5%, a judicious choice at the moment.

One way UPS will be able to increase productivity and efficiency is by adopting artificial intelligence. In 2023, for example, UPS opened a new facility where AI and machine learning take center stage. Named UPS Velocity, the Kentucky-based warehouse has more than 700 mobile robots in operation, and UPS plans to increase that number to 3,000 by the end of the year. Powered by AI and machine learning, mobile robots and human employees currently move more than 350,000 packages throughout the 900,000 square foot facility.

It’s not just in warehouses that UPS is harnessing the power of AI. The company has relied on AI since 2012 to optimize delivery routes. According to UPS, Orion “recalculates individual package delivery routes throughout the day based on changing traffic conditions, pickup commitments and delivery orders.” By optimizing routes for changing conditions, UPS can reduce both the number of miles drivers travel and the amount of fuel vehicles must use – both factors that help the company reduce costs. From 2012 to 2020, UPS estimated that Orion helped the company achieve annual savings of approximately 100 million miles and 10 million gallons of fuel.

An oil major with a yield of 4.2%

Lee Samaha (Chevron): Warren Buffett bought Chevron stock this year even though the stock price was disappointing. The stock is down slightly over the last year, compared to the S&P 500’s 31% rise, and the price of oil is still above $80 a barrel.

A reason, which also explains why its peers are underperforming like ExxonMobil, ConocoPhillipsAnd Western oil So far this year, there has been uncertainty surrounding its proposed $60 billion acquisition of Hesse. Oil majors are looking to acquire energy assets because they generate a lot of cash thanks to a relatively high oil price. Meanwhile, the sector continues to fall out of favor with investors due to concerns over fossil fuel investments as the world moves toward clean energy solutions.

That said, oil still plays an extremely important role in the global economy, and there is upward pressure on prices due to OPEC and OPEC+ production cuts. Whoever wins the next election will have to replenish the massive drains on the U.S. Strategic Oil Reserve made by the current administration in an attempt to lower gasoline prices.

In addition, the International Energy Agency (IEA) has already raised its estimate of oil demand four times since November.

If the oil bulls and Warren Buffett are right, then Chevron, with or without Hess, is likely to generate significant cash flow in the future, and that’s great news for income-seeking investors.

Pipeline-Fed Passive Income

Daniel Foelber (The Morgan children): When the market is surging, it’s easy to overlook quality pipeline and energy infrastructure stocks like Kinder Morgan. After all, growth prospects are limited.

Existing infrastructure could lose value if demand for oil and natural gas declines over the coming decades. But this is not the case currently. 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 to facilitate its transport abroad.

Kinder Morgan’s projects require high upfront costs but generate stable cash flow through 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 per share following the 2015 oil and gas crash, Kinder Morgan has since increased its dividend to $0.2825, a yield of 6.3%. Kinder Morgan has steadily increased its dividend every year since 2018, and there will likely be another moderate increase over the next two quarters.

Kinder Morgan has done an impressive job of getting its balance sheet in order by paying down debt. To maintain a healthy balance sheet, Kinder Morgan must support the dividend with free cash flow so it doesn’t have to burn through cash or take on debt. Two useful metrics to compare are its FCF yield and its dividend yield.

KMI Free Cash Flow Yield ChartKMI Free Cash Flow Yield Chart

KMI Free Cash Flow Yield Chart

As you can see from the chart, Kinder Morgan’s FCF yield is higher than its dividend yield. FCF yield is simply FCF per share divided by the stock price. But more importantly, it tells us what the dividend amount could be if Kinder Morgan paid its entire FCF. The roughly four percentage point difference between the FCF yield and the dividend yield gives Kinder Morgan a nice margin for error. This indicates that its dividend is affordable and there is room to increase it in the future.

All things considered, Kinder Morgan is worth considering if you’re looking for an investment focused on passive income rather than potential capital gains.

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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Chevron and Kinder Morgan. The Motley Fool recommends Occidental Petroleum and United Parcel Service. The Motley Fool has a disclosure policy.

Buying These 3 High-Yielding, Dividend-Paying Stocks Could Be a Brilliant Move to Boost Your Passive Income was originally published by The Motley Fool

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