It can be hard to find a good dividend stock when the broader market's yield is a miserly 1.3%. But you can do it if you are willing to look hard enough. One good place to start is with stocks that are underperforming, such as Archer-Daniels Midland(NYSE: ADM) and UPS(NYSE: UPS). Both have historically high yields today.
Archer-Daniels Midland is getting back to normal
Archer-Daniels Midland, usually just referred to by its ticker ADM, has a dividend yield of 3.4% today. That's more than twice the level of the S&P 500 index and, notably, well above the stock's 10-year average yield of about 2.7%. The reason for the elevated yield is, as the chart below shows, because of a significant decline in the stock price. This year alone, ADM is down more than 18%.
The good news is that ADM has a huge business processing and handling agricultural commodities. It is an entrenched industry giant with a $28 billion market cap. Since it's an integral part of the global food chain, its business is, basically, a necessity. And, given its size and reach, it would be difficult to replace ADM's operations, affording it something of a protected position in the market.
The bad news is that ADM's market is commodity-driven and, thus, its top and bottom lines can vary greatly from year to year. The stock is down today because commodity prices are retreating from a huge post-coronavirus pandemic peak. Investors are reacting to the exaggerated commodity swing by selling the stock, even though the business is really just getting back to a more normal level.
In fact, if you think in decades and not days, ADM's entrenched industry position means its business remains well positioned for success. Notably, the company has increased its dividend for roughly five decades, suggesting that it is still a reliable dividend stock.
Given the historically high yield, down and out Archer-Daniels Midland is worth a closer look for investors who want to buy and hold good companies for the long term.
UPS is trying to take off again
UPS's dividend yield is about 5.1%. That's about four times the yield on the S&P 500 index. The yield is also notably above the roughly 3.1% 10-year average yield for the stock. Like ADM, the reason for the historically high yield is a dramatic stock pullback, as the chart below highlights. The year-to-date drop is nearly 18%.
The good news is that UPS is one of the two largest package delivery services in the U.S. (it has a market cap of more than $110 billion), and it has an entrenched industry position globally, as well. Its logistic network, which includes a vast collection of sorting warehouses, airplanes, and trucks, would be hard to replicate. And while Amazon(NASDAQ: AMZN) has increasingly built out its distribution capacities, it still makes extensive use of UPS's services. For now, Amazon is more of a partner than a threat. In fact, this relationship shows how hard it would be to simply cut UPS out of the package delivery picture.
The bad news is that UPS's business got a little bloated and, while Amazon hasn't displaced the company, its internal distribution efforts have been a small headwind. UPS has reacted by working to slim down while refocusing around its best market niches, like medical-related deliveries. The effort has been a bit rocky, with second-quarter 2024 earnings coming in weaker than investors expected on both the top and bottom lines. But the volume of packages UPS handled turned higher after a string of declines after the coronavirus pandemic demand peak. So the quarterly update wasn't all bad.
Given the roughly 15-year streak of annual dividend increases here and the generous yield, long-term investors should probably take a glass-half-full approach to the stock. It's the kind of entrenched industry giant you'll be happy to buy and hold for decades.
Every company goes through hard times
No business rises in a straight line -- they all zig and zag with good times followed by bad times and vice versa. Often the best time to buy a stock is when it is experiencing a little hardship, which is the case for both ADM and UPS right now. But the key for each is that they have enormous businesses that would be difficult to replace, affording each long-term staying power. In time, both are likely to muddle through the current hardships while continuing to reward dividend investors that are willing to ride out a little short-term uncertainty.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
