Does UPS's 7% Dividend Yield Make the Stock a No-Brainer Buy?

A dividend shouldn't be the main reason to invest in a stock. But when you're talking about a quality business that also has a solid dividend, especially a safe one, that could make it too good a buy to pass up.

United Parcel Service (NYSE: UPS) is a leading company in the logistics industry, but in recent years it has fallen out of favor with investors, as fears are rising of a slowdown in the economy. Trade wars and tariffs can also reduce the number of packages shipped around the world. The stock has fallen 24% thus far in 2025, and that's with UPS recently getting a boost from a better-than-expected earnings report.

With the company's financials not looking so troubling of late and the stock yielding an incredible 7% right now, has UPS become a no-brainer buy?

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Is UPS' dividend safe?

Before diving in on a high-yielding stock, it's important to assess the safety of it. Investors can look at payout ratios and cash flows to get an idea of how well the company can sustain the current dividend and whether a cut or suspension might be around the corner.

UPS pays $1.64 per share in dividends quarterly, and that's a number to keep in mind while you read earnings reports, to see how much higher than that its earnings per share are. If they're below that figure, that could be a sign of trouble.

In the company's most recent quarter, which ended on Sept. 30, UPS' diluted EPS did indeed come in below that figure, at $1.55, although on an adjusted basis, the EPS was $1.74. It's a little concerning, but the company is in the midst of cost-cutting measures that should help improve overall profitability. Ideally the EPS figure would be considerably higher, but it's not so far off from the dividend rate that the company should need to cut it.

Another way to evaluate the safety of the dividend is to look at free cash flow, which tells investors how much money is left after spending on day-to-day operations and capital expenditures. Over the past nine months, UPS' free cash flow has totaled $2.7 billion, which works out to an annual rate of around $3.7 billion. That is also a troubling figure given that management expects to pay around $5.5 billion in dividends over the course of the full year.

Should investors be worried?

At first glance, the cash flow and low EPS figure might seem concerning. But the company's recent earnings numbers were encouraging and came in better than expected (analysts were expecting adjusted EPS of just $1.30). Plus, UPS has some big levers to pull to improve efficiency and profitability in the future. The company is going to eliminate 48,000 jobs this year in order to restructure its operations and adjust for a slowdown in demand.

And management certainly didn't seem too concerned about the dividend. On the earnings call, Chief Financial Officer Brian Dykes said the company expects "to generate significantly more free cash flow over time" and alluded to a possible increase in the dividend "in the very near future."

Is UPS stock a good buy?

Shares of UPS jumped after the release of its latest earnings numbers, but the stock is still modestly priced, trading at a price-to-earnings multiple of only 13; the S&P 500 average is 26.

The company is in the midst of a turnaround, and so there is going to be some risk here, which is why I wouldn't call the stock a no-brainer buy, but UPS does have strong fundamentals and a solid business, and it is making necessary moves to improve its financials. For those reasons, I'm optimistic that the company is going in the right direction and its valuation should improve. I also think a dividend increase could be coming next year, but it'll likely be another modest one; its last two increases were just $0.01 each.

If you're willing to take on some risk, this can be one of the better dividend stocks to buy and hold right now.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends United Parcel Service. The Motley Fool has a disclosure policy.