Market downturns present investors with ample opportunities to pick up shares of high-yielding dividend stocks at depressed valuations. And while there are often hidden gems in the bargain bin, an easier path to grow one’s wealth over time is to invest in stable businesses with solid track records of rewarding their shareholders.

Two methods that companies can use to bolster their shares’ value for the long term are stock buybacks and dividend hikes. United Parcel Service (UPS), Kinder Morgan (KMI), and Caterpillar (CAT) are dividend payers that have what it takes to grow their earnings and cash flow to support decades of dividend raises. Here’s what makes each of these quality businesses a great buy now.

Sleep well at night with UPS
Daniel Foelber (UPS): Few companies combine industry leadership, effective management, high margins, and growth opportunities quite like UPS. Add in a dividend that yields 3.5% at the current share price and a streak of not cutting its payouts since the year 2000, and you have a passive income opportunity that can last a lifetime.

UPS stock broke out in 2020 due to a COVID-19-induced surge in business-to-consumer deliveries. Since then, the company has produced impressive top- and bottom-line growth while sustaining a high operating margin.

Despite its solid performance, UPS can only do so much to combat the impacts of macroeconomic conditions such as potential slowdowns in consumer and business spending. Like other package-delivery and transportation companies, UPS benefits mightily from broad-based economic growth, which tends to bolster domestic and international commerce. If the U.S. slips into a recession, expect the short-term performance of UPS to take a hit as well.

But if we zoom out and look at the big picture, it becomes clear that UPS is doing just about everything it can to ensure it can grow its business for decades to come. Under the leadership of CEO Carol Tome, it has shifted its focus from growing delivery volumes to growing high-margin revenue streams. The result of that strategy has been services orientated toward healthcare, the automotive industry, small and medium-sized businesses, and business-to-business deliveries instead of simply efforts to grow residential package delivery volumes.

UPS management has a track record of setting reasonable expectations, exceeding guidance, and delivering on its promises. The company’s high margins and sizable free cash flow generation will support future dividend raises. UPS stock is a safe choice for investors looking for a quality business that also pays an attractive dividend.

This pipeline stock provides a pipeline of passive income to your portfolio.
Scott Levine (Kinder Morgan): While seeking reliable dividend payers to fortify your financial future is a wise strategy, identifying them is not always such an easy feat. Fortunately, energy infrastructure stock Kinder Morgan is clearly a dividend darling that demands consideration. With the stock paying a dividend with a forward yield of 6.3% at the current share price, investors who buy now can get a leg up on a strong passive income stream.

Operating about 70,000 miles of natural gas pipelines throughout the United States, Kinder Morgan plays a critical role in the U.S. energy landscape. But wait, there’s more. This midstream powerhouse also touts itself as North America’s largest independent terminal operator (with 140 terminals in its portfolio) and its largest independent transporter of petroleum products such as gasoline and jet fuel. Kinder Morgan’s expansive infrastructure provides it with a formidable moat and an enduring competitive advantage.

Besides moving natural gas and petroleum products throughout the country, Kinder Morgan is moving capital into shareholders’ wallets thanks to its sizable dividend. If Kinder Morgan achieves its target of raising its dividend by 2% in 2023, it will mean the company has hiked its dividend at a 12% compound annual rate since 2016. It’s not merely the dividend growth that warrants recognition but the fact that the dividend is covered by the company’s free cash flow, demonstrating management’s prudent approach to rewarding shareholders.

For forward-looking investors interested in a steady flow of passive income for years to come, Kinder Morgan warrants careful consideration. And now represents a particularly good time to pick up shares with the stock trading at 14.8 times expected forward earnings.

Caterpillar is reducing the cyclicality of its earnings
Lee Samaha (Caterpillar): A highly cyclical industrial company might not be everyone’s first thought as a reliable dividend payer, but hear me out. Caterpillar has increased its dividend for 30 years in a row, and its efforts to reduce the cyclicality of its business mean it will be in an even stronger position to do so in the future.

During the company’s investor day presentation in 2019, management outlined two essential plans that help illustrate why it’s an excellent passive income candidate now. The first was a plan to double its services revenue from $14 billion in 2016 to $28 billion in 2028. Given that services revenue tends to be a lot less cyclical than equipment sales (customers may hold off buying new equipment during an economic slowdown, but are a lot less likely to neglect servicing the equipment they already own) the shift implies the company is building a more recession-resistant earnings mix.

Second, the increase in services revenue will help Caterpillar’s machine, energy, and transportation segment generate free cash flow of $4 billion to $8 billion through the cycle rather than a previous range of $3 billion to $6 billion.

The good news is that outside of the detour it took in the pandemic year of 2020, Caterpillar appears well on track to hit those targets. Moreover, its free cash flow — even at its cyclical low — easily covered its dividend payouts. If Caterpillar stays on this track, investors can expect many years of dividend growth.

— Daniel Foelber, Scott Levine, and Lee Samaha

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Source: The Motley Fool