Do you like passive income? Then you’ll love these 3 dividend stocks.

Collecting dividends is one of the proven ways to survive stock market volatility. The advantages are threefold.

Not only do dividend stocks provide a steady stream of passive income no matter what the market does, but they also provide peace of mind knowing that income is being generated from your investments without the need to sell shares.

Additionally, dividend-paying companies that can support their payouts with earnings tend to be high-quality companies with excess earnings, giving them a margin of safety during tough times.

United Parcel Service (UPS -0.38%), Air products and chemicals (ODA -3.10%)And The reception deposit (HD 0.84%) have dividend yields of 3.54%, 2.46% and 2.9%, respectively, with an average of around 3%. They stand out as three great stocks to buy now. These three Motley Fool contributors explain why.

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A tough year ahead for UPS, but the transformation continues

Lee Samaha (UPS): No need to tiptoe around the elephant in the room: this parcel delivery giant is about to have a tough year. A slowing economy usually means fewer deliveries.

Indeed, UPS management expects its domestic and international package volume to decline this year, and Wall Street analysts have revenue down slightly in 2023 with earnings per share (EPS) dropping from 12 $.94 in 2022 to $11.49 in 2023.

That said, this earnings estimate for 2023 puts UPS on a forward price/earnings (P/E) multiple of just 15.8 times earnings. That’s a reasonable valuation for a company in a lean year. Moreover, it is an excellent valuation for a company with strong long-term growth prospects.

The ebb and flow of the economy somewhat masks the underlying improvement in business activity over the past few years. An increased focus on growth markets like small and medium enterprises (SMEs) and healthcare has led to margin expansion and strong free cash flow.

He also encouraged UPS to be more selective about its delivery contracts, and the company is improving the quality of its revenue as a result. This has led to a dynamic where UPS is growing revenue and margins even as volume declines.

All in all, the transformation of its business means that UPS is set to increase its profits sharply in the event of a downturn/recession. As such, it is an excellent stock to capture any market-induced weakness.

Stock up on passive income with Air Products

Scott Levin (Air Products and Chemicals): Even in the best of times, income-savvy investors know it’s risky to just chase after high-yielding dividend stocks. Instead, it’s best to look for quality companies with a track record of successfully managing their business growth while rewarding investors.

Air Products, for example, has a long history of returning capital to investors: 41 years of consecutive annual dividend increases. An achievement like this does not come easily and deserves recognition. If Air Products meets its forecast and returns $7 per share to investors through the dividend, it will represent a compound annual growth rate of 10% from 2014 to 2023.

But the company’s decades-long history of increasing its dividend is just one reason Air Products is so alluring. The company’s conservative approach to increasing its distribution also deserves credit. It doesn’t want to jeopardize its financial health to please investors with a high payout, as evidenced by its average payout ratio of 60.9% over the past 10 years.

Investors will see that Air Products is not resting on its laurels. It has several growth projects under development that could provide the company with the ability to continue its streak of increasing its payment, such as major hydrogen projects as its joint venture with AES in Texas and a green hydrogen project in Saudi Arabia.

And Air Products’ longstanding businesses, such as supplying semiconductor manufacturers with crucial industrial gases, should appeal to dividend investors.

Repair your wallet with Home Depot

Daniel Foelber (The home depot): The Home Depot is one of the most recognizable retail outlets in the United States. And the Atlanta-based company also happens to be a long-term outperformer.

The business model may seem simple at first glance. But Home Depot’s incredibly complex supply chain and diverse product and service offerings give it a wide moat that Lowe’s Companies can only hope to compete.

Home Depot stock has been choppy over the past year and is currently within striking distance of a 52-week low. The decline in share price, coupled with year-over-year dividend increases, boosted the yield to 2.9%. It’s not as high as the 4% yield on a 10-year Treasury note, but it’s still a significant source of passive income.

In terms of valuation, Home Depot is decently priced. Its P/E of 17.3 is well below its 10-year median. But its price to free cash flow (FCF) ratio is above the 10-year median.

Table of HD PE ratios

HD PE report given by Y charts.

Yet Home Depot is generating far more FCF than it needs to cover the dividend, a sign that the company can sustain future cash dividend increases.

The Home Depot is part of Dow Jones Industrial Average and is an incredibly powerful brand. Even so, business performance can be cyclical. The Home Depot relies on both a healthy consumer and thriving industries in home improvement, construction and other trades.

Thus, it benefits greatly from a good economy and is also penalized by a weak economy. If the United States slips into a recession, expect Home Depot’s performance to suffer.

However, owning The Home Depot for at least three to five years is still a great way to unlock passive income and be invested in a high-quality business.

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