UPS overpromised and underdelivered for the third year in a row.
Management believes free cash flow will continue to improve, justifying future dividend increases.
UPS’s valuation is so cheap that the company only needs to produce mediocre results to regain favor on Wall Street.
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High yielding dividend stocks are a great way to participate in the stock market while generating passive income. But even the highest yielding stock in the S&P 500 — LyondellBasell Industries (yielding 12.6%) — couldn’t keep up with the S&P 500’s recent gains on dividends alone. At the time of writing, the index is up 16.6% year-to-date after gaining more than 20% in both 2023 and 2024.
The best reason to buy high-yielding dividend stocks is not to try to beat dividend indexes. Rather, it is to invest in solid companies at good values that also reward investors with dividends. A dividend is reliable only if the company paying it can bear the expense.
Investing $4,000 in United Parcel Service(NYSE: UPS)investors can expect to earn $275 in annual dividends based on its current yield. Here’s why the stock is a buy in 2026.
Image source: Getty Images.
UPS continues to disappoint investors, down about 25% year-to-date and up just 15% from its 12-year low. Revenues and margins increased during the COVID-19 pandemic. Both values have fallen steadily over the past three years, in line with the decline in UPS’s stock price.
Despite the challenges, UPS has remained committed to its dividend, which now yields a staggering 6.9%, since the stock has fallen so much. This is a tasty incentive for people who want to hold onto the stock in hopes that UPS can turn things around.
But it’s a mistake to buy a stock solely for yield — as UPS’s recent performance demonstrates. Even factoring in dividends, UPS investors have still lost 28.1% over the past five years, while the S&P 500 would have doubled your money over that period.
As you can see in the following chart, UPS’s dividend has grown significantly in recent years, while earnings and free cash flow (FCF) have continued to decline.
UPS Dividend Data (Annual) by YCharts
Now, the dividend is slightly higher than earnings and FCF, which is usually a red flag that a dividend cut could be on the way. However, UPS believes its dividend is sustainable and could even grow. UPS CFO Brian Dykes had the following to say on UPS’s fiscal third quarter 2025 earnings call:
We are seeing growth in the areas of the markets where we want to grow, which allows us to achieve better returns and better margins. With the cost reductions and network efficiencies we are creating through our investment in automation, we expect the business to generate significantly more free cash flow over time. Clearly, we have a dividend of about $5.4 billion to $5.5 billion and we expect to be above that in the very near future.
After over-extending its network during the pandemic, UPS has worked to increase efficiency and adjust to the new normal of slower growth in package deliveries, particularly in the residential sector, as consumers tighten their spending. These improvements are already starting to pay off, as UPS’s margins have at least stopped falling.
UPS margins should continue to recover as it makes a concerted effort to reduce low-margin, high-volume deliveries and focus on more profitable areas such as small and medium-sized businesses, business-to-business and time- and temperature-sensitive medical deliveries. In fact, UPS plans to reduce delivery volumes for Amazon by 50% by June 2026. Given that Amazon is UPS’s largest customer, this may cause revenue to decline. However, it could be the right move in the long run if it allows UPS to capture higher-margin opportunities while making the company leaner and more flexible.
Analysts seem to agree, as consensus estimates have UPS booking $6.87 in 2025 earnings per share (EPS) and $7.16 in 2026 EPS.
IF UPS achieves its estimated 2026 EPS, it will have a price-to-earnings (P/E) ratio of just 13.2, based on a stock price of $94.76 per share at the time of writing.
For context, UPS’s 10-year average P/E is 19.7 — showing how cheap the stock is right now.
In recent years, UPS hasn’t given investors much to cheer about. With a massive reconfiguration of the network in preparation for Amazon’s turnaround in 2026, it’s understandable that some investors may not want to invest in the stock now.
Management’s confidence in improving FCF to justify future dividend increases is a relief for passive income investors. UPS could cut its dividend if the plan doesn’t go well, but that seems less likely now.
Even if UPS cuts its dividend, it would still be a high-yielding stock and have a higher yield than its peers. FedEx.
Given its very cheap valuation, income investors looking for high-yield stocks at a good value might want to take a closer look at UPS 2026.
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Daniel Foelber has no position in any of the listed stocks. The Motley Fool has positions in and recommends Amazon and United Parcel Service. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.
All it takes is $4,000 invested in this high-yielding dividend stock to generate $275 in passive income by 2026 was originally published by The Motley Fool
