We recently compiled a list of the 7 Best Stocks to Buy for Passive Income. In this article, we are going to take a look at where United Parcel Service, Inc. (NYSE:UPS) stands against the other good stocks to buy for passive income.
With rising costs in today’s world, people are constantly searching for ways to earn additional income. To do this, many rely on side hustles to make ends meet. A recent survey of 2,300 people by Bankrate revealed that over a third (36%) of US adults have a side job. This trend is proving increasingly profitable. In 2023, side hustles brought in an extra $810 per month on average; this year, that figure has grown to $891.
While side hustles have proven profitable for many, some individuals prefer earning income passively rather than through additional work. During the 2020 pandemic, vending machines emerged as a popular passive income idea. From 2019 to 2023, mentions of passive income and vending machines on platforms like X and Instagram more than tripled and grew sixfold, respectively, according to the social media management company Sprinklr. Google searches for passive income also surged by about 75% during that time. Although many Americans are earning money from this investment, its long-term success has yet to be fully proven.
The concept of earning passive income becomes more straightforward and clear through investing in stocks, particularly dividend equities. These investments have already demonstrated their value, consistently delivering strong returns in the past. Over the years, the portion of personal income derived from dividends has gradually risen, making them a significant source of earnings. As reported by S&P Dow Jones Indices, dividend income has grown from 2.68% in the fourth quarter of 1980 to 7.88% in the second quarter of 2024, while interest income has dropped from 14.58% to 7.61% during the same timeframe. The report also mentioned that since 1936, dividends have contributed to over one-third of the total returns from the broader market, while capital gains have accounted for the remaining two-thirds.
Also read: 12 Best Long-Term Stocks to Buy According To Warren Buffett
Dividend stocks with higher yields often attract investors. In addition, companies that have consistently increased their payouts over the years are excellent for generating passive income. As long as they maintain this trend, they offer a growing stream of income, often with less volatility than regular stocks. While these stocks may not always provide the highest yields compared to other dividend-paying options, patient investors who choose companies that raise their dividends consistently, regardless of market conditions, can eventually enjoy income streams that surpass the returns from bonds.
The growing significance of dividend stocks is evident in the steady increase in payouts by companies worldwide. Global income investors experienced a robust second quarter of 2024, with payouts rising 5.8% to a record high of $606.1 billion, according to the latest Janus Henderson Global Dividend Index report. Following this strong performance and considering the anticipated contributions from new dividend payers, the forecast for 2024 dividends has been revised upward. It is now expected that global companies will distribute $1.74 trillion in dividends, a 6.4% increase from 2023 on an underlying basis (up from the previously forecasted 5.0%) and a headline increase of 4.7% (up from the earlier estimate of 3.9%). With this, we will have a look at the best stocks to buy for passive income.
Our Methodology:
For this list, we used a stock screener to identify dividend-paying companies with yields over 4.5% as of September 16. From this list, we selected companies known for consistently increasing their dividends, ideally those that have done so for at least 10 years. We then chose the top 7 stocks from this list based on the number of hedge funds holding stakes in them at the end of Q2 2024, according to Insider Monkey’s database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A warehouse filled with boxes of parcels, symbolizing the companies reliable logistics services.
United Parcel Service, Inc. (NYSE:UPS)
Number of Hedge Fund Holders: 44
Dividend Yield as of September 16: 5.12%
United Parcel Service, Inc. (NYSE:UPS) ranks fourth on our list of the best stocks to buy for passive income. The American multinational shipping and supply chain management company offers various related services to its consumers. The company has faced challenges adapting to a changing operating environment, with reduced shipping demand and rising inflationary costs. It fell short of high-growth expectations as market observers noticed a decline in package volumes. Additionally, earnings were impacted by increased fuel and labor costs, which squeezed profit margins. In the second quarter of 2024, the company reported revenue of $21.8 billion, which showed a 1.07% drop from the same period last year. The revenue also missed analysts’ expectations by over $418 million.
Due to the company’s struggling phase, ClearBridge Investments decreased its position in United Parcel Service, Inc. (NYSE:UPS) in Q2 2024. This is what the firm said about UPS in its second-quarter investor letter:
“Our industrials holdings weighed on relative performance as we are more exposed to transports such as “less than truckload” provider XPO and parcel delivery company United Parcel Service, Inc. (NYSE:UPS), which are struggling with weak volumes during the post-COVID freight recession. With industry volumes down to pre-COVID levels and strong pricing power in the LTL space in particular, we believe that the next upcycle will prove to be very strong for earnings. As a result, we added to XPO in the quarter while reducing our position in UPS on concerns that industry capacity remains excessive. Meanwhile, we have less exposure to electrical equipment stocks, which have been rewarded by views that they will benefit from the buildout of AI data centers.”
That said, early indications of a potential turnaround in the company’s latest update provide investors with some optimism. According to United Parcel Service, Inc. (NYSE:UPS)’s earnings report, this quarter marked a key milestone, as the company achieved volume growth in the US for the first time in nine quarters. As anticipated, operating profit for the first half of 2024 declined compared to the previous year. However, the company expects to see a return to operating profit growth moving forward.
In addition to this, United Parcel Service, Inc. (NYSE:UPS) also reported a strong cash position, which is positive news for income investors. In the first six months of the year, the company generated an operating cash flow of $5.3 billion, and its free cash flow came in at over $3.3 billion. It has raised its payouts for 22 years in a row. Currently, the company offers a quarterly dividend of $1.63 per share and has a dividend yield of 5.12%, as of September 16.
According to Insider Monkey’s database of Q2 2024, 44 hedge funds owned stakes in United Parcel Service, Inc. (NYSE:UPS), up from 43 a quarter earlier. These stakes are worth over $1.3 billion in total. With over 2.5 million shares, Marshall Wace LLP was the company’s leading stakeholder in Q2.
Overall UPS ranks 4th on our list of the best stocks to buy for passive income. While we acknowledge the potential for UPS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than UPS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.