With the S&P 500 hovering around an all-time high, some investors might be looking for safer investments that generate passive income without the stock market needing to go higher. The S&P 500 has long been a source of passive income. But investing in an S&P 500 index fund yields just 1.5% right now, far lower than the risk-free 10-year Treasury rate at 4.2%.

The S&P 500's yield is down because the index's growth has outpaced the growth rate of many top dividend stocks, and the fact that the index is now made up of a higher percentage of companies that don't pay dividends at all (or very low dividends).

Chevron (NYSE: CVX), United Parcel Service (NYSE: UPS), and Coca-Cola (NYSE: KO) all yield more than double the S&P 500. Here's why each dividend stock is worth buying now.

Chevron: Dividend growth and upside potential

A lot is going right for Chevron right now. The company just raised its dividend by 8% to a record high thanks to a strong overall performance in 2023. It also bought back a record amount of its own stock last year.

And to top it all off, Berkshire Hathaway's latest 13F filing showed that it increased its Chevron stake by 14.4% in the fourth quarter of 2023.

Chevron is down 17.8% from its all-time high, but if oil prices remain where they are, it has what it takes to make a new all-time high.

West Texas Intermediate, the domestic benchmark oil price, is $78 a barrel as of this writing. It's not the blowout price we saw in 2022, but Chevron doesn't need a triple-digit oil price to generate gobs of free cash flow.

Technological improvements, portfolio optimization, and cost reductions have combined to make today's market leaders some of the most efficient and profitable producers the energy industry has ever seen.

Chevron has the balance sheet needed to handle a drawdown in oil prices, and plenty of upside potential if oil prices climb from here. It also has a 4% dividend yield, which is competitive in today's market.

UPS stock has fallen far enough

UPS hasn't always been the high-yield dividend stock it is today. In early 2022, it raised its dividend by 49% on the back of record years in 2020 and 2021. It has raised its dividend slightly since then. Today, it pays a $1.63 quarterly dividend, good for a forward yield of 4.4%.

S&P 500 dividend yield data by YCharts

As you can see in the chart, UPS' yield is higher than historic levels, Chevron's has moved up and down due to the volatility of the oil and gas industry, Coke's has stayed consistent, and the yield of the S&P 500 has trended down.

UPS' yield is particularly high because the stock has been under pressure. Despite management's hopes, the surge in package delivery volumes in 2020 and 2021 has proved to be less sticky than originally thought. Revenue has been declining, but it's the profitability that has taken the biggest hit since UPS has continued to invest in growth and route expansions.

UPS revenue (TTM) data by YCharts; TTM = trailing 12 months

Operating margins went from a 10-year high to near a 10-year low. Earnings are getting closer to reaching their pre-pandemic levels. And so is the stock price, which finished 2019 at $117 a share and is currently around $148.

The setup for UPS makes a lot of sense. The company is undergoing a cyclical downturn but is less than 30% higher than where it finished in 2019. That's way too low for all of the improvements UPS has made over the last four years, not to mention the dividend is far higher today.

Results for UPS will probably get worse or at least languish before they get better. But if you're patient, it could be a great turnaround play to buy now, not to mention a worthwhile passive-income source.

Coca-Cola: Your best friend when the market takes a turn for the worse

The dividend yields of individual companies can rise and fall for various reasons. But the two big factors are a stock's price and its history of dividend raises.

If a stock rises, on average, 5% a year and raises its dividend at 5% per year, we should expect the yield to stay the same. Whereas if a stock doubles, but the company only raises the dividend by 25%, then investors will be happy even though the stock has a lower yield.

Coca-Cola has been underperforming the market. But it has been an incredible dividend payer. On Feb. 15, it announced its 62nd consecutive annual dividend increase, bringing the quarterly dividend to $0.485 per share, or $1.94 per year.

The company is a Dividend King — one of a group of businesses that have paid and raised their dividends annually for at least 50 consecutive years. However, many Dividend Kings implement minimum raises to keep the streak alive.

Coke doesn't do that. It has the earnings growth and balance sheet to make more meaningful raises. The recent raise boosted the dividend by 5.4%, which is a lot for a company the size of Coca-Cola. Over the last 12 months, it has paid nearly $8 billion in dividends, so for each percentage point it increases, it pays another $80 million a year.

Coke might not always keep pace with a strong bull market, but its business model isn't cyclical and is recession-resistant. It is dependable no matter what the market is doing. That might not mean much for a young risk-tolerant investor with a multidecade time horizon. But for a risk-averse investor or someone in retirement, Coca-Cola is the perfect dividend stock to buy now.

The right way to invest in dividend stocks

Dividend-paying companies take a portion of their earnings and return them to shareholders instead of using all of their earnings to fuel their growth. The strategy makes sense for established businesses like Chevron, UPS, and Coke, but not for a fast-growing company with capital-intensive growth opportunities.

For this reason, dividend-paying companies often underperform the market when it is putting up blowout returns, but they can keep pace or even beat the market during mediocre conditions.

These three companies aren't ideal investments if you're trying to ride the market wave higher, but they are the perfect long-term investments for compounding wealth over time — a strategy that is always better than trying to time the market.

Chevron, UPS and Coke deserve to be top choices for investors looking for well-rounded companies with yields that are substantially higher than the market average.

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

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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