United Parcel Service (UPS -2.75%) has had a difficult couple of years, and at Wednesday’s prices, the stock is down roughly 20% since the start of 2023. Still, the decline in the stock price means the dividend yield is now north of 5%. That’s an attractive yield — but how many shares would you have to buy to generate $5,000 in passive income yearly from this high-yield stock?
$5,000 in passive income from buying UPS stock
UPS’ current dividend is $6.52 a share. Consequently, investors would need to buy 777 shares to generate $5,000 in passive income next year (that’s $5,000 divided by $6.52), translating to an investment of almost $99,000 based on the recent stock price around $127.
Investors might not need to buy so many shares provided UPS raises its dividend for the 16th consecutive year in 2025. That’s more of a possible outcome than a probable one.
Management’s stated aim is a dividend payout of about “50% of prior year adjusted EPS,” according to the Investor Day presentation in March. Wall Street expects adjusted earnings per share of $7.48 in 2024 and $8.75 in 2025. The 50% figure implies a dividend payout of $3.74 in 2025 and $4.38 in 2026 — significantly lower than the current $6.52.
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What UPS management said about the dividend
Management was asked about the dividend on the earnings call in April. UPS’ payout ratio — dividends as a percentage of earnings — is 87% of Wall Street’s earnings estimates for 2024, and it was also high back then. CEO Carol Tome responded that the company plans to lower its payout ratio by increasing earnings, not slashing the dividend. “We have no intent to cut the dividend just to make that math work,” she said. “We’re going to earn back into it, and the dividend is an important part of the value proposition.”
Don’t be surprised if UPS halts dividend increases for at least 2025 and possibly 2026. The assumption that 777 shares will generate $5,000 in passive income looks good.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
