Looking For Passive Income? Morgan Stanley Sees Major Upside In These Dividend Stocks Yielding Up To 9.6%

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The timeless adage “buy low, sell high” has attracted countless people to participate in the stock market. But as many discover the hard way, the strategy is easier said than done.

Stocks don’t always go up. Even though the S&P 500 is up 7% in 2023, it’s still down 14% compared to where it was at the end of 2021.

The good news? You don’t have to actively trade stocks to make money. You can also collect dividends.

With the right dividend stocks, investors can bypass the stress and uncertainty associated with attempting to time the market while benefiting from a steady stream of passive income.

After all, business magnate John D. Rockefeller once said, “Do you know the only thing that gives me pleasure? It's to see my dividends coming in.”

But most companies don’t pay much these days. The average dividend yield of S&P 500 companies is just 1.7% at the moment.

But some companies pay much more. Here’s a look at three that Wall Street juggernaut Morgan Stanley finds particularly attractive — they yield up to 9.6%.

Don't miss:

PepsiCo Inc. PEP

You don’t need an MBA to see why PepsiCo is a great dividend-paying business. With a portfolio of iconic brands like Pepsi, Lay’s, Gatorade and Quaker, the company is deeply entrenched in the global beverage and snack industry.

Because consumers buy these products on a regular basis, PepsiCo can run a recurring business and return cash to investors.

The company’s current quarterly dividend rate of $1.265 per share gives the stock an annual yield of 2.7%.

The yield itself may not seem like much, but what makes PepsiCo stand out is its ability to grow the payout consistently — the company has raised its dividend every year for 51 consecutive years.

If management continues this streak, investors who purchase the stock today can look forward to earning a higher yield on cost in the years to come. 

Morgan Stanley analyst Dara Mohsenian has an Overweight rating on PepsiCo and a price target of $210 — around 13% above where the stock currently sits.

American Electric Power Co. Inc. AEP

American Electric Power is an electric utility headquartered in Columbus, Ohio. The company operates and maintains more than 225,000 miles of distribution lines that deliver power to 5.6 million customers in 11 states.

American Electric is one of the largest electricity producers in America with around 30,000 megawatts of generating capacity, including over 7,000 megawatts of renewable energy.

Electric utilities have long been a staple for many income investors. They provide an essential service, and the business is resilient. Even in a recession, people still turn their lights on at night.

American Electric currently pays quarterly dividends of 83 cents per share. Trading at $85.17 per share, the stock yields 3.9%.

Year to date, American Electric shares have slipped about 10%, but Morgan Stanley analyst David Arcaro sees a rebound on the horizon. The analyst has an Overweight rating on American Electric and a price target of $104, implying a potential upside of 22%.

Energy Transfer LP ET

For the real yield-hungry investor, check out Energy Transfer, which owns one of the largest portfolios of energy assets in the U.S.

With approximately 120,000 miles of pipelines and associated energy infrastructure, the partnership has a strategic network that spans 41 states and all of the major production basins in the country.

In April, Energy Transfer announced a quarterly cash distribution of 30.75 cents per unit. At the current unit price, the amount translates to an annual yield of 9.6%.

In the first quarter, Energy Transfer’s distributable cash flow (DCF) attributable to partners totaled $2.01 billion, which was more than the amount needed to pay cash distributions to partners for the quarter.

“On an incurred basis, we had excess DCF of $640 million after distributions of $967 million and growth capital of $407 million,” Energy Transfer Co-CEO Tom Long said during the earnings conference call.

Morgan Stanley analyst Robert Kad has an Overweight rating on Energy Transfer and a price target of $17. Considering that the stock currently trades at $12.75, the price target implies a potential upside of 33%.

Stocks are volatile — and even blue-chip dividend stocks are not immune to the market’s wild swings. If your goal is to earn a steady stream of passive income, you might want to look into reliable dividend plays outside the stock market.

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