Starbucks (NASDAQ: SBUX) has been in the spotlight since poaching Chipotle CEO Brian Niccol. But even after the recent jump in the price, Starbucks stock is still down year to date while the broader indexes have posted impressive gains.
Despite its lackluster performance, it has become a rock-solid dividend stock. So have United Parcel Service (NYSE: UPS) and American Electric Power (NASDAQ: AEP).
Investing $1,000 into each stock should generate over $110 in passive income per year. Here’s why these fool.com contributors think all three stocks are worth buying now.
A new fearless leader
Daniel Foelber (Starbucks): The S&P 500 is up 92% over the last five years while Starbucks is down over 4%. Something clearly has gone wrong for the former darling growth stock. But it’s not easy to see at first glance.
Sales took an understandable dip during the worst of the pandemic, but the company has since returned to growth while achieving an operating margin above 15%. The stock market cares more about where a company is going than where it has been, however, and Starbucks finds itself at a difficult crossroads.
Howard Schultz started Il Giornale — which merged with Starbucks and took its name in the late 1980s — based on the vision for quality espresso and a “third place” away from work and home. But the Starbucks of today is focused on selling as many drinks and food items as possible and is heavily dependent on mobile orders and drive-thrus.
Its competitive advantages used to be quality coffee, a cozy atmosphere, and free internet. Today, its competitive advantages are convenience and customization.
The pivot makes sense in the long term, but the brand has undeniably changed. It takes operational excellence to pull off a potential existential makeover. Starbucks failed to do that, leading to sluggish growth, fading pricing power, and uncertainty about the direction of the business.
Schultz saw China as the future growth driver of the company. But the management team prior to Niccol seemed to lack direction on what eggs to put in each basket.
Niccol could be just what Starbucks needs to find its footing, establish a clear strategic direction, and execute operationally — arguably for the first time in several years.
Even if the turnaround takes a while, investors can take solace in knowing that Starbucks has a mere 25.9 price-to-earnings ratio, a yield of 2.5%, and has raised its dividend every year since 2010.
Ride out the volatility
Lee Samaha (UPS): Currently trading at a dividend yield of 5.1% and commanding a solid position in the package delivery market, UPS is attractive to income-seeking investors. That said, there’s a reason such a high-profile blue chip stock trades on such a dividend yield, and it comes down to the near-term risk around its earnings.
Simply put, there’s excess capacity in the small-package delivery market following a boom in demand in 2020-2022, leading to capacity expansion and a subsequent volume decline in 2023. That’s hurting UPS’ ability to grow revenue per piece, and second-quarter earnings were nothing short of disappointing. Management significantly lowered its full-year guidance as UPS is taking on more lower-margin deliveries.
The good news is that industry volume growth is slowly growing again. Still, it will take time to reduce excess capacity, and the company’s outlook will remain under question for a while yet.
That said, it’s not unusual for industries to go through such cyclical periods, not least one whose volumes were artificially boosted by the lockdowns and then pushed lower by rising interest rates curtailing economic activity.
On a positive note, the underlying trend toward e-commerce spending continues. UPS is progressing well on targeted end markets like small and medium-size businesses and healthcare.
If you can tolerate the potential for some stock price volatility this year, UPS is a decent option for dividend investors.
Powering investors’ portfolios with passive income for more than a century
Scott Levine (American Electric Power): Ask a group of investors to identify the characteristics of a great dividend stock, and you’ll surely receive a variety of answers. Nonetheless, there will likely be agreement about some core qualities — like those seen in American Electric Power.
A lengthy history rewarding shareholders and sound financials make the utility — and its 3.6% forward dividend yield — a great choice for a dependable high-yield stock.
American Electric Power, one of the largest regulated electric utilities in the United States, operates a sizable electric network: 40,000 miles of transmission power lines, 225,000 miles of distribution power lines, and 23 gigawatts of electricity generation capacity.
With these assets, it provides power to 5.6 million customers in 11 states. Since it is a regulated utility, American Electric Power is assured of certain profit margins by the public utility commissions that oversee its operations. This stable cash flow provides management with excellent insight into future capital expenditures such as infrastructure upgrades and dividend payments. The company, for example, projects steady growth in operating cash flow over the next five years from $6.7 billion in 2024 to $8.6 billion in 2028.
For over 113 years, the utility has paid investors a quarterly dividend, a streak that is matched by only a select number of other companies. Naturally, there’s no guarantee that the company will extend the streak further, but it seems highly likely.
Management targets growing the dividend on pace with operating earnings, which it forecasts to have 6% to 7% annual growth. This circumspect approach to hiking the dividend isn’t surprising since the company has averaged a conservative payout ratio of 70% over the past five years.
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Daniel Foelber has positions in Starbucks and has the following options: short September 2024 $80 calls on Starbucks and short September 2024 $95 calls on Starbucks. 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 has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends United Parcel Service and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
All It Takes Is $1,000 Invested in Starbucks and Both of These 2 Dividend Stocks to Generate Over $110 in Passive Income Per Year was originally published by The Motley Fool
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