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3 High-Yield Dividend Stocks That Are Bursting with Long-Term Potential

Motley Fool - Tue Aug 2, 5:00AM CDT

The stock market just posted its best month since November 2020 as investors shrug off high inflation and rising interest rates, and focus instead on an economic recovery. No one knows where the stock market or the economy could be headed in the coming quarters. But history tells us that quality companies that pass along excess earnings to investors through dividends and buybacks can provide an excellent source of passive income even amid market volatility.

Investing in equal parts of United Parcel Service(NYSE: UPS), Watsco(NYSE: WSO), and Tronox(NYSE: TROX) gives an investor an average dividend yield of 3.2% and exposure to different industries in the industrial and material sectors. Here's what makes each stock a great buy now.

Parcels on a conveyor belt.

Image source: Getty Images.

UPS is positioned to deliver decades of earnings and dividend growth

Daniel Foelber (UPS): UPS reported second-quarter 2022 results on July 26 that included top and bottom line growth despite difficult comps from Q2 2021. What makes UPS an impressive company -- and one worth owning for decades to come -- is that it addresses challenges head on instead of using them as an excuse for poor results.

A good example of this dynamic from the last quarter was lower package-delivery volumes. However, UPS successfully passed along costs to consumers through added fuel charges and higher rates, which is why its operating margin is actually forecasted 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 would hurt its performance. A trend investors may be familiar with is UPS' increased focus on small- and medium-sized businesses (SMBs). UPS believes that a lot of the high-margin growth in e-commerce will come from SMBs over residential and large business customers. For Q2 2022, SMBs made up 29.2% of total U.S. delivery volume. It didn't happen overnight, as UPS has spent years expanding routes and investing in its Digital Access Program, which provides tools that SMBs can use to plan shipping and logistics and grow their businesses.

All told, UPS continues to grow nicely despite challenges. It is paying its employees more and focusing on retaining top talent. It is generating plenty of free cash flow and net income to support its dividend, which was increased by 49% earlier this year. UPS stock has a 3.2% dividend yield and a 15.7 price-to-earnings ratio -- 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 Q2 earnings report serves to strengthen the case.

The company reported 15% sales growth (14% on a same-store sales basis) in the quarter over the same period last year. Given that same-store sales rose 29% in the same period the previous year, it's a remarkable performance. Moreover, it speaks to the surging interest in spending on HVACR created by the lockdowns. CEO Albert Nahmad believes its end markets will "return to more historical levels of demand" in the future. That's understandable enough, and investors should look for Watsco's growth to moderate too.

That said, the increase in HVACR units installed in the U.S. will only strengthen the long-term growth potential for recurring revenue for a parts distributor like Watsco. Meanwhile, its investments in geographic expansion (its network has grown 15% over the last three years) and technology platforms (e-commerce facility to make it easier for dealers to order parts) came at the right time. As a result, Watsco's 3.2% dividend yield looks sustainable through a downturn (thanks to its recurring revenue from parts distribution), and the stock remains an excellent option for income-seeking investors.

Dig into the dividend -- and growth -- that this chemical stock offers

Scott Levine (Tronox): An attractive high-yield dividend plus ample growth potential are hardly qualities that are both found in many stocks, but that's exactly what investors will find when looking into Tronox. Capable of expanding upon the growth that it has already achieved, the company, a leading producer of titanium dioxide, offers investors a tasty 3.1% dividend yield today.

Found in a variety of products -- from plastics to solar panels to paints -- titanium dioxide is an important material for a diverse range of industries, and Tronox is there to supply them. The company is vertically integrated, which helps reduce costs. In addition to digging titanium dioxide out of the ground at six mines located around the world, Tronox operates nine pigment facilities where it prepares the chemical for customers.

The growth of infrastructure in emerging and developed markets and increasing global automobile production are only two examples of how titanium dioxide is expected to remain in demand over the coming years. In fact, according to the research firm, Grand View Research, the global titanium dioxide market is forecast to rise at a compound annual growth rate of 6% from 2021 to 2028.

With shares of Tronox tumbling about 35% this year due to fears of near-term headwinds, investors have the ability to pick up the stock at a steep discount. Currently, shares are valued at about 3.3 times operating cash flow, representing a notable discount to their five-year average cash flow multiple of 6.1.

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Daniel Foelber has no position in any of the stocks mentioned. 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 Watsco. The Motley Fool has a disclosure policy.

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