By Al Root
United Parcel Service has had a devil of a year. Higher labor costs, weaker freight markets, a break with Amazon.com, and tariff headwinds caused the stock to drop 20% this year. But it now yields more than 5%, and therein lies the rub.
While UPS's dividend yield, one of the highest in the S&P 500, looks tantalizing, Wolfe Research strategist Chris Senyek points out that being in the highest-yielding club doesn't typically add up to stock market success. Most high-yielders typically have high yields for a reason -- see UPS's list of recent woes -- though they may still be worth buying. Investors just have to be a little more careful before diving in.
A 5% dividend is far from typical. Nonfinancial dividend payers in the S&P 500 doled out about $650 billion in dividends over the past 12 months, for a yield of about 2.3%. Those payouts represented a reasonable 44% of free cash flow generated over that span, and the companies had net debt of 1.8 times trailing earnings before interest, taxes, depreciation, and amortization, or Ebitda, a common measure of balance sheet strength. Most companies can -- and should -- pay their dividends out of free cash flow or earnings, with ample amounts of both left over for investment, share repurchase, or whatever else management teams and their boards deem prudent.
There's very little cash or cushion among the highest-yielding stocks. The 12 highest nonfinancial, non-real-estate yielders include Ford Motor, cigarette maker Altria, chemical companies LyondellBasell and Dow Inc., Verizon Communications, Pfizer, food makers Conagra, Campbell's, and Kraft Heinz, packaging company Amcor, Best Buy, and UPS. They yield almost 7%, on average.
That dozen paid out almost $45 billion in dividends, or about 70% of free cash flow. Debt to Ebitda for the group is about three times, which doesn't provide much of a cushion or signal financial strength. It also helps explain why, heading into the week, the group lost investors roughly 10% on average so far this year and trades for about 10 times estimated 2026 earnings, when the S&P 500 has returned about 17% and trades for about 22 times.
The riskiest of the high-yielders look to be the chemical companies, Lyondell and Dow. Both are mired in a cyclical downturn, which is depressing earnings, and both have paid out more in dividends than the free cash flow they generated over the past 12 months. That dynamic is expected to persist in 2026, according to Bloomberg estimates. It's why Lyondell stock yields an incredible 12.6% and Dow about half that after cutting its dividend in half in July. A bet on Lyondell or Dow needs to be a bet on the rapid recovery of the chemical markets, and not on the safety of the dividend.
The rest of the dozen are expected to generate more free cash flow than dividends will consume in 2026. What's more, all are expected to improve their earnings this coming year. The stocks with the largest margin of safety include Amcor, Verizon, Kraft-Heinz, Best Buy, and Campbell's. Their coverage ratios are forecast to be closer to 60%, not as good as the average, but not bad considering the yields. The companies' balance sheets look OK at close to three times estimated Ebitda. Amcor's debt, at 3.8 times Ebitda, is the highest of the bunch after debt spiked following its merger with Berry Global in April. All that means less pressure to cut dividends.
As for UPS, business isn't supposed to improve all that much, though it is expected to generate enough free cash flow to cover dividend payments, if barely. But there's a chance business might be getting better, not worse. FedEx reported better-than-expected fiscal second-quarter earnings last week. UPS delivered better-than-expected fourth-quarter guidance in October, when management also defended its payout.
Improving business conditions are part of dividend safety, too. If it materializes, UPS could prove to be a good bet.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 23, 2025 02:30 ET (07:30 GMT)
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