When interest rates rise, the cost of capital increases. So it makes sense that investors should demand a reason for putting money into stocks instead of a risk-free asset like a Treasury Bill.
The easiest way to justify investing in a stock is if it produces a dividend yield equal to or higher than the risk-free rate. Investing in equal parts of Ford Motor Company (F), United Parcel Service (UPS), and Brookfield Renewable (BEP) (BEPC) produces a dividend yield of 4.4% while also granting exposure to the potential upside (or downside) of each investment.
Here’s why each company is set up to succeed over the long term, and why each stock is worth considering as a source of passive income.
A well-rounded automaker for the long-term
Daniel Foelber (Ford): Ford stock is down 52% from its all-time high and is within striking distance of its 52-week low.
Some of the sell-off is for good reason, as there are plenty of headwinds affecting the company. For starters, automobiles are consumer discretionary products — which tend to suffer declining demand during periods of slowing economic growth. And while most recessions correspond with falling interest rates, this downturn is unique in that it is being primarily driven by rising interest rates — which make it more expensive to finance a car.
Moreover, Ford has been ramping up battery production to produce electric vehicles (EVs), like the F-150 Lightning, the Mustang Mach-E SUV, and the E-Transit-350.
The company’s investments could lead to growth in the future. But for now, disrupted supply chains, higher raw material costs, and lower demand is taking a one-two punch to the short-term outlook for EVs.
To offset this headwind, Ford is raising the price of the F-150 Lightning. The price increase, paired with past increases, means the vehicle now starts at 40% more than the initially announced entry-level price of $40,000 in May 2021. Ford sold just over 2,000 F-150 Lightning trucks in November and 13,258 F-150 Lightning trucks between May and November despite a backlog of more than 200,000 orders. The question, now, is whether consumers who reserved the truck will come through and actually buy it. Given the higher price and drying up consumer demand, it wouldn’t be surprising if the pool of willing buyers begins to shrink.
The short-term outlook for Ford is bleak. But it’s in the company’s best interest to invest for the long term, even if it means a few bad quarters to come. In this vein, it’s understandable for investors to wait and see how demand for Ford legacy models and EVs fairs in 2023 before hitting the buy button on the stock. But the reinstatement of Ford’s dividend and a recent dividend raise has pushed the stock’s yield to a hefty 5.3%. Ford stock is worth owning for investors that want a passive income stream, a trusted brand, and who believe in the future of EVs.
The investment proposition at UPS is often misunderstood
Lee Samaha (UPS): A lot of virtual ink has been wasted discussing the “threat” to package delivery companies from Amazon’s move to build its own distribution network. A new entrant with a lot of financial firepower is always a concern, especially when that company is an existing customer. However, there are more than enough e-commerce deliveries to go around. So a large part of the investment case for UPS is based on the idea that it’s being more selective over deliveries rather than chasing volume growth for its own sake.
FedEx has dropped contracts with Amazon , and UPS CEO Carol Tome said on the company’s recent earnings call that “both volume and revenue for Amazon is coming down” and added, “We project by the end of this year that Amazon revenue will be less than 11% of our total revenue.”
In fact, the case for buying UPS stock is based on management is choosing to expand in margin-enhancing areas like deliveries for small and medium-sized businesses and the healthcare sector. It’s a strategy that’s working, and it’s worth noting that UPS’s revenue, profit, and margin are all rising in its U.S. domestic package segment even as volumes are declining.
In a nutshell, UPS is winning the war on expanding margins. Given the long-term potential for growth and its selectivity over deliveries, it can do so for many years to come, provided the economy grows. As such, investors can expect its $6.08 dividend (currently yielding 3.4%) to grow alongside it.
Brookfield Renewable is a green way to generate green for your portfolio
Scott Levine (Brookfield Renewable): You’ve spent hours trying to find the perfect presents for the special ones in your life. Now you’re looking to reward your efforts with a gift for yourself — the gift of passive income. Fortunately, you don’t need to search far and wide. Brookfield Renewable and its 4.6% dividend yield are a great way to power your passive income stream for years to come.
Brookfield Renewable operates a massive portfolio of green power assets. The $69 billion in assets under management represents 24 gigawatts of operating capacity, spanning various clean energy sources: solar power, wind power, hydropower, and energy storage. With these assets, Brookfield Renewable inks long-term power purchase agreements with customers that provide steady cash flows. The company, in turn, returns this capital to investors in the form of dividends.
Over the past 10 years, Brookfield Renewable has increased its distribution at a compound annual growth rate of 6%. And that level of commitment to rewarding investors doesn’t seem as if it’s going to taper off anytime soon. Management reaffirmed its dedication in a recent investor presentation, where it stated that the company is “well positioned to continue growing our distributions by 5%-9% annually and delivering 12%-15% total returns to unitholders over the long term.”
Naturally, some skeptics may question whether management’s distribution increases are viable. It’s a fair thought and an important reminder to not simply take management’s forecasts on their surfaces. It seems, though, that Brookfield Renewable’s target is quite attainable. For one, the company is on solid financial footing, maintaining an investment grade balance sheet rated BBB+ by Fitch Ratings. In addition, management forecasts funds from operations per unit will grow at about 10% from 2022 through 2027 alone.
— Daniel Foelber Scott Levine, and Lee Samaha
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Source: The Motley Fool