Best High Yield Dividend Stocks to Buy in 2024

Given the tremendous growth in 2020 and 2021, it’s hard to believe. united parcel service (UPS -0.75%) Stock prices have fallen over the past three years. However, fundamentals are showing a downward trend. And there are questions about whether the company’s margin expansion is sustainable or just the result of a boost from the pandemic.

UPS faces a difficult 2024. Nonetheless, it stands out as one of the best high-yield dividend stocks to buy next year. Here’s why:

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Invest for long-term growth

The biggest challenge when valuing a stock like UPS is separating continuous improvement from cyclical performance. Looking at the latest numbers, there’s no denying that UPS has benefited from the surge in consumer goods spending and surge in package delivery demand caused by the pandemic. At least some of the huge gains were one-time windfalls.

But over the years, UPS has made meaningful improvements to its logistics, routes, and operations. We are also expanding our business areas to healthcare, automobiles, and small and medium-sized businesses (SMBs). The proof is in the numbers. UPS’s Digital Access for Small Business program, combined with its healthcare segment, is expected to reduce overall sales by more than $5 billion, but sales in 2023 are expected to be $2.7 billion higher than in 2021.

This statistic tells us that some of UPS’s growth is more permanent and not simply a cyclical benefit. And long-term investments are partially offsetting cyclical issues.

UPS is globally diversified.

The biggest mistake UPS investors make is assuming that: every The post-pandemic growth was temporary and the company will return to 2019 levels. In fact, the company has done an excellent job of leveraging its outsized gains in 2020 and 2021 to improve its business fundamentals and increase its resilience to cyclical economic downturns.

UPS earned more net income in the first three quarters of 2023 than in 2019 or 2018. This is true even considering that the company cut its full-year guidance as growth decelerated faster than expected.

UPS generates most of its revenue from its U.S. domestic segment. But operating profit distribution may surprise you. In the third quarter of 2022, UPS generated $24.1 billion in revenue (63.6% of which was in the U.S.) and $3.1 billion in operating profit (53.5% of which was in the U.S.). In the third quarter of 2023, UPS will have revenue of $21.1 billion (64.9% in the U.S.) and operating profit of just $1.34 billion. In the US, operating profit is only 42.5%.

Importantly, the U.S. domestic segment is a lower margin business compared to the company’s international business and its Supply Chain Solutions segment in general. So don’t read too much into U.S. cyclical trends, especially shipping volumes, since U.S. residential deliveries are the company’s lowest margin business.

very attractive dividends

UPS said in its third quarter earnings call that it plans to pay about $5.4 billion in dividends this year. For comparison, UPS paid out $5.1 billion in dividends in 2022, but only $3.4 billion in dividends in 2021. Ten years ago, in 2013, it paid out $2.3 billion in dividends.

Even if UPS endures a short-term period of low growth, considering how high its dividend is, the stock is now in a completely different category than it was in the past. There’s only so far a stock can go before yields become too attractive to ignore for such a high-quality business.

UPS is still up more than 21% from its 52-week low. Nonetheless, the stock still yields 4.1%, which is higher than the risk-free 10-year Treasury rate of 3.9%.

For investors who want to take some risk and invest in UPS stock with a rate of return that is essentially the same as the risk-free rate, but want additional exposure to the potential upside (and downside) of the stock market and economic growth, it really makes sense. After all, UPS benefits from long-term e-commerce trends. And the stock is dirt cheap, with a price-to-earnings ratio (P/E) of just 16.4. Even if UPS’s revenue declines in 2024, it would be a huge disappointment for UPS to even come close to 2024. S&P 500 P/E is 26.3.

Simply put, UPS is too good a company to give up, with a valuation too cheap and a dividend yield too high.

Charting a path toward continued growth

There are several key attributes to look for when searching for a good cyclical company. The first is the ability to withstand a recession by cash funding growth projects, operations, and dividends while maintaining a strong balance sheet. Another quality to look for is where the company is on the other side of the cycle.

Ideally, investors would like to see a flat or slight decline during a recession followed by a gentle cascade of “higher peaks” during the next growth cycle.

For UPS, the company has what it takes to manage economic downturns and achieve new heights when the cycle improves. CEO Carol Tomé has consistently emphasized the company’s long-term investments in revenue generation, emphasizing that while many of these investments may take time to succeed, they will ultimately benefit the company and its shareholders.

UPS stands out as a perfect dividend stock to own in 2024 because while the dividend is a significant incentive to hold the stock during periods of volatility, there’s also the potential for the business to rebound faster than expected and the market will reward patient investors.