2023-07-13 17:00:00 ET
Summary
- A high Dividend Yield is particularly attractive for investors when achieving an attractive Total Return on your investment at the same time.
- In today’s article, I will introduce you to two companies that could provide your portfolio with an attractive Total Return in addition to a relatively high Dividend Yield.
- Both companies are financially healthy, possess strong competitive advantages, and currently have an attractive Valuation.
Investment Thesis
I believe that the main goal for investors should be achieving an attractive Total Return. A high Dividend Yield is less useful for investors when an attractive Total Return is not being obtained.
Companies that could be able to achieve this goal in providing you with a relatively high Dividend Yield but potentially with an attractive Total Return as well, are particularly attractive for investors in my opinion. This is because investors can generate extra income via dividends without the need to sell positions of their investment portfolio while at the same time steadily increasing their wealth.
In today’s article, I will introduce you to two companies that have the potential to deliver both a relatively high Dividend Yield and an attractive Total Return. In addition to that, both picks possess strong competitive advantages, are financially healthy and currently have an attractive Valuation, indicating that they are attractive choices for dividend income investors at this moment in time.
The two companies needed to fulfil the following requirements to be part of a pre-selection:
- Dividend Yield [FWD] > 3%
- P/E [FWD] Ratio < 30
- EBIT Margin [TTM] > 5% or Net Income Margin [TTM] > 5%
These are the companies that I have selected for the month of July:
UPS
United Parcel Service [UPS] is a package delivery company that was founded in 1907. The company currently has a Market Capitalization of $155.74B.
I believe that UPS has strong competitive advantages that help it to build an economic moat over possible new entrants into the business segment in which the company operates. Its competitive advantages include - among others - a strong brand image, its worldwide network of distribution facilities as well as strong customer relationships.
I believe that UPS is an excellent choice for dividend income investors due to its relatively high Dividend Yield [FWD] of 3.60%, its long track record of dividend payments (the company has shown 22 consecutive years of dividend payments) and dividend enhancements (with 13 consecutive years of dividend growth). Moreover, the company has a relatively low Payout Ratio of 51.07% and has shown a 5 Year Dividend Growth Rate [CAGR] of 12.53%.
The characteristics mentioned above make me believe that investors should benefit significantly from an investment in UPS via dividend payments when investing over the long term (and not speculating over the short term).
I further believe that UPS is undervalued at its current price levels. This is confirmed when having a look at the company’s P/E [FWD] Ratio of 16.81, which currently stands 10.95% below the Sector Median (which is 18.88). In addition to that, the company’s Dividend Yield [TTM] of 3.49% lies 18.21% above its Average from the past 5 years (2.96%), further indicating that UPS is currently undervalued.
When compared to its competitor FedEx (NYSE: FDX ), it can be highlighted that UPS pays shareholders the significantly higher Dividend Yield: while UPS’ Dividend Yield [FWD] strands at 3.60%, FedEx’s is 2.01%. However, I believe that FedEx is the more attractive pick when considering Dividend Growth: while UPS’ Dividend Growth Rate [CAGR] over the past 3 years stands at 16.81%, the one of FedEx is even higher (Dividend Growth Rate [CAGR] of 31.11% over the past 3 years).
FedEx also has the lower Payout Ratio (31.46%) when compared to UPS (51.07%), serving as another indicator that FedEx is more attractive for those investors prioritizing dividend growth instead of dividend income.
Due to Amazon’s (NASDAQ: AMZN ) continuous expansion of its logistics and distribution network, I definitely consider the company to be among UPS’ strongest competitors (over the long term). Due to the intense competition that UPS has with companies such as FedEx and Amazon, I suggest limiting the proportion of an investment in UPS to a maximum of 5% of your overall portfolio. This strategy will help you to reduce the downside risk of your portfolio while increasing the probability of achieving excellent investment results when investing over the long term.
In terms of Valuation, it can be highlighted that UPS has a P/E [FWD] Ratio of 16.81, which lies above the one of FedEx (P/E [FWD] Ratio of 14.89). However, it lies significantly below the one of Amazon (P/E [FWD] Ratio of 82.83).
These numbers can be interpreted in a way that Amazon is the pick with the highest growth expectations that have been priced into the stock price. However, it should be taken into consideration that Amazon is also the one that has shown the highest growth rates: Amazon’s Revenue Growth Rate [CAGR] over the past 5 years stands at 22.13%, while UPS’ is 7.72% and the one of FedEx is 6.61%.
However, in terms of Profitability, UPS seems to be superior to its peer group, which is underlined by its higher EBIT Margin [TTM] of 12.94% when compared to FedEx (7.09%) and Amazon (2.54%), thus underlying the company’s financial health.
Below you can find the Profitability metrics for UPS when compared to FedEx and Amazon, which increases my confidence that UPS is an excellent pick when it comes to Profitability.
The chart below shows the projection of UPS’ Dividend and Yield on Cost when assuming an Average Dividend Growth Rate [CAGR] of 7% for the next 30 years (this is a conservative assumption, since the company’s Dividend Growth Rate [CAGR] over the past 10 years stands at 10.19%).
Taking into account the company’s current stock price of $182, you could potentially achieve a Yield on Cost of 7% in 2033, 13.78% in 2043 and 27.10% in 2053. These numbers further demonstrate that UPS could be an excellent pick for dividend income investors when investing over the long term.
Energy Transfer
Energy Transfer is a provider of energy-related services . The company currently has a Market Capitalization of $40.33B. A number of reasons have contributed to me selecting Energy Transfer as one of my two top high dividend yield companies to invest in during this month of July 2023.
The company has strong competitive advantages to which I count its broad network of pipelines, its geographical diversity and its economies of scale. Taking into account the company’s current stock price, it pays shareholders a Dividend Yield [FWD] of 9.58%. It's important to mention that Energy Transfer has a Free Cash Flow Yield [TTM] of 15.55%. This indicates that investors can benefit from an investment in the company without the need for it to fulfill high growth targets. It further shows that the company is attractive in terms of risk and reward from an investors perspective.
It is also worth mentioning that Energy Transfer has shown a Dividend Growth Rate [CAGR] of 5.76% over the past 10 years, providing investors with evidence that the company could be able to grow investors dividend income annually at a relatively attractive rate.
As I have already explained in previous articles, I consider this mixture of dividend income and dividend growth important for investors, since it not only helps them to increase the additional income in the form of dividends year over year, it also helps them become more independent from price fluctuations of the stock market. In addition to that, it provides investors with the benefit of not needing to sell positions from their portfolio with the objective of obtaining capital gains.
From my point of view, Energy Transfer is at least fairly valued. I believe so because its P/E GAAP [FWD] Ratio of 9.02 only stands 0.83% over the Sector Median. Furthermore, the company’s Price / Sales [FWD] Ratio of 0.46 lies 3.01% below its Average from over the past 5 years and 65.23% below the Sector Median. Another indicator that demonstrates the company is at least fairly valued is its Price / Cash Flow [FWD] Ratio of 3.79, which lies 13.15% below the Sector Median.
By comparing Energy Transfer to competitors such as The Williams Companies (NYSE: WMB ) and Kinder Morgan (NYSE: KMI ), it can be highlighted that Energy Transfer provides investors with a significantly higher Dividend Yield: while Energy Transfer’s current Dividend Yield [FWD] lies at 9.58%, The Williams Companies’ is at 5.44% and Kinder Morgan’s is at 6.67%, indicating that Energy Transfer is currently the most appealing pick for investors seeking dividend income. Below you can find a comparison of Energy Transfer’s dividend metrics when compared to competitors such as The Williams Companies and Kinder Morgan.
Energy Transfer also has a lower Payout Ratio than these competitors, indicating that the probability of a dividend cut is slightly lower: while Energy Transfer has a Payout Ratio of 82.65%, The Williams Companies’ is 89.71%, and Kinder Morgan’s is 98.67%. These Payout Ratios indicate that the risk of investing in The Williams Companies or Kinder Morgan is slightly higher. This is the case because a dividend cut could have a significant negative impact on the stock prices of the companies.
However, in terms of Dividend Growth, Kinder Morgan seems to be the most appealing choice for investors, which is underlined by its higher Dividend Growth Rate [CAGR] over the past 5 years (14.16%) when compared to The Williams Companies (5 Year Dividend Growth Rate [CAGR] of 6.39%) and Energy Transfer (-1.43%).
I believe that Energy Transfer is currently the most attractive pick in terms of Valuation when compared to its peers: this is confirmed by Energy Transfer’s current P/E [FWD] Ratio of 9.02, which lies significantly below the one of The Williams Companies (P/E [FWD] Ratio of 17.18) and Kinder Morgan (15.00).
The fact that Energy Transfer’s Price/Cash Flow [TTM] Ratio of 3.99 also stands significantly below The Williams Companies (7.49) and Kinder Morgan (7.27), can be interpreted as an additional indicator that Energy Transfer is the most adequate pick in terms of Valuation.
However, due to the relatively high risk factors that come attached to an investment in Energy Transfer (particularly due to the company’s relatively high Payout Ratio), I generally suggest not to overweight the company in an investment portfolio and to limit the proportion of the stock to a maximum of 3% of your overall investment portfolio.
Risk Factors
The risk factors of an investment are important to consider since they determine the probability of making successful investments over the long term: the lower the risk factors that come attached to an investment, the higher the probability of making successful long-term investments in my opinion.
From my perspective as an investor and investment analyst, it is more important to invest in companies that are highly likely to help you achieve a relatively attractive Total Return over the long term rather than investing in a company that only provides a low probability of delivering an outstanding Total Return.
One of the main risk factors that I see for Energy Transfer is a possible dividend cut in the future. This is the case since the company’s Payout Ratio of 82.65% is relatively high. A dividend cut could have significant negative effects on its stock price and therefore could negatively influence the Total Return of your investment portfolio. For this reason, I suggest underweight Total Energy in your portfolio, providing the company with a maximum of 3% of your overall investment portfolio.
In terms of Dividend Safety, it can be highlighted that I consider UPS’ dividend to be safer when compared to Energy Transfer's. This is the case, since UPS’ Payout Ratio stands at a relatively low level of 51.07%, indicating that the company’s dividend should be relatively safe within the near future.
From my point of view, the biggest risk factor for UPS investors is the company’s strong competition with companies such as FedEx, Deutsche Post ([[DPSTF]]; [[DHLGY]]) and Amazon. Particularly the fact that Amazon is increasingly expanding its logistics and distribution network is a threat for UPS and a risk for UPS investors over the long term.
For this reason, I suggest limiting the proportion of an UPS investment to a maximum of 5% of your overall investment portfolio, helping you to reduce the portfolio’s risk level and to increase the probability of achieving excellent investment results over the long term.
Conclusion
I believe that both Energy Transfer and UPS can help you generate a significant amount of extra income in the form of dividends. Both companies possess strong competitive advantages, provide investors with an attractive Dividend Yield and have shown Dividend Growth within the past years.
However, you should be aware of the risk factors that come attached to an investment in these companies: while I believe that a dividend cut is among the biggest risk factors for Energy Transfer investors, I believe that the intense competition with FedEx, Deutsche Post and Amazon is among the biggest risk factors for UPS investors.
Due to these risk factors that come attached to an investment, I suggest limiting the proportion of Energy Transfer to a maximum of 3% of your overall portfolio while I suggest that you limit the UPS position to a maximum of 5%.
I believe that the two companies fit into the type of dividend income-oriented investment portfolio that I aim to help you build with my investment analyses. This type of portfolio has the goal of helping you generate a significant amount of extra income via dividend payments, while providing your investment portfolio with dividend growth and prioritizing its Total Return (including dividend payments and capital gains).
Author’s Note: I would appreciate your opinion on this article! If you could only choose two high dividend yield companies for this month of July, which would you select?
For further details see:
If I Could Only Buy 2 High Dividend Yield Companies In July 2023