The stock market just posted its best month since November 2020, as investors shrug off high inflation and rising interest rates, and instead focus on an economic recovery. No one knows where the stock market or the economy might head over the next few quarters. But history tells us that quality companies that pass excess earnings on to investors through dividends and buybacks can be an excellent source of passive income, even in volatile market conditions.
Invest equally United Parcel Service (UPS 0.23%), watsco (BSM 1.78%)and Tronox (TROX 0.06%) gives an investor an average dividend yield of 3.2% and exposure to different industries in the industrials and materials sectors. Here’s what makes each stock a great buy now.
UPS is well positioned to deliver decades of earnings and dividend growth
Daniel Foelber (UPS): UPS released its second-quarter 2022 results on July 26, which included revenue and net income growth despite tough comparisons from the second quarter of 2021. What makes UPS an impressive company — and one that deserves to be possessed for decades to come – it’s that she is instead meeting the challenges head-on. to use them as an excuse for poor results.
A good example of this dynamic last quarter was the drop in parcel delivery volumes. However, UPS has been able to pass the costs on to consumers through additional fuel charges and higher fares, which is why its operating margin is actually expected to increase in 2022 to a 10-year high of 13 .7%.
What’s more, UPS continues to invest in its long-term growth despite the risk that a prolonged economic downturn will hurt its performance. One trend investors may be familiar with is UPS’s increased focus on small and medium-sized enterprises (SMEs). UPS estimates that much of the high-margin growth in e-commerce will come from SMBs rather than residential and large enterprise customers. For the second quarter of 2022, SMBs accounted for 29.2% of total US shipment volume. It didn’t happen overnight, as UPS has spent years expanding its routes and investing in its Digital Access Program, which provides tools SMBs can use to plan shipping and logistics. and expand their business.
All in all, UPS continues to grow well despite the challenges. It pays its employees more and focuses on retaining top talent. It generates plenty of free cash flow and net income to support its dividend, which was increased by 49% earlier this year. UPS stock has a dividend yield of 3.2% and a price/earnings ratio of 15.7, making it a good source of passive income at a reasonable valuation.
Watsco offers recession resistance
Lee Samaha (Watsco): Heating, ventilation, air conditioning and refrigeration (HVACR) parts distributor Watsco is a stock to buy for a bear market. The company’s latest second-quarter earnings report serves to bolster the case.
The company reported sales growth of 15% (14% based on same store sales) in the quarter compared to the same period last year. Given that comparable store sales increased 29% over the same period last year, this is a remarkable performance. Additionally, it speaks to the growing interest in HVAC spending created by the shutdowns. CEO Albert Nahmad believes its end markets will “return to more historic demand levels” in the future. This is quite understandable, and investors should also expect Watsco’s growth to be moderate.
That said, increasing the number of HVACR units installed in the United States will only enhance the long-term potential for recurring revenue growth for a parts distributor like Watsco. At the same time, its investments in geographic expansion (its network has grown by 15% over the last three years) and technology platforms (e-commerce facility to facilitate parts ordering for dealers) came at just the right time. . As a result, Watsco’s 3.2% dividend yield looks sustainable in a downturn (thanks to its recurring revenue from coin distribution), and the stock remains a great option for investors looking for income. .
Dig into the dividend – and growth – this chemical action offers
Scott Levine (Tronox): An attractive high-yield dividend more Significant growth potential are hardly qualities found in many stocks, but that is exactly what investors will find when looking at Tronox. Able to extend the growth it has already achieved, the company, a leading producer of titanium dioxide, today offers investors a tasty dividend yield of 3.1%.
Found in a variety of products – from plastics to solar panels to paints – titanium dioxide is an important material for a wide range of industries, and Tronox is here to supply them. The company is vertically integrated, which helps to reduce costs. In addition to extracting titanium dioxide from the ground in six mines located around the world, Tronox operates nine pigment facilities where it prepares the chemical for customers.
Infrastructure growth in emerging and developed markets and increasing global automotive production are just two examples of how titanium dioxide is expected to remain in demand over the next few years. In fact, according to research firm Grand View Research, the global titanium dioxide market is expected to grow at a compound annual growth rate of 6% from 2021 to 2028.
With Tronox shares having fallen around 35% this year on fears of short-term headwinds, investors have the option of buying the stock at a steep discount. Currently, the shares are valued at approximately 3.3 times operating cash flow, which is a notable reduction from their five-year average cash flow multiple of 6.1.
Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in the stocks mentioned. Scott Levine has no position in the stocks mentioned. The Motley Fool holds positions and endorses Watsco. The Motley Fool has a disclosure policy.