Want Safer Package Delivery Income? FedEx Pays a Smaller Yield but Keeps Far More Cash
America's two package delivery giants both pay dividends, but one is running its payout dangerously close to the edge of its own cash flow while the other raises its dividend for a sixth straight year on less than a third…
Two companies move most of America’s packages, and they now offer opposite deals for income investors. United Parcel Service (NYSE:UPS | UPS Price Prediction) has a forward dividend yield of about 6.55%, which puts it in ultra-high-yield territory. FedEx (NYSE:FDX) pays a much smaller yield but keeps far more of its cash. The yield gap gets the attention, but coverage is what decides which payout is worth owning, and on coverage the two parcel giants look very different.
FedEx: A Smaller Yield With a Much Wider Safety Cushion
At a recent price of $301.02, FedEx’s annualized forward dividend of $4.88 per share works out to a yield of about 1.62%. That makes it a modest income stream today. Every other item on the dividend-safety checklist shows plenty of room.
FedEx’s payment change may alarm dividend screeners. FedEx’s quarterly payment fell from $1.45 to $1.22 per share with the first payment after the company spun off FedEx Freight (NYSE: FDXF). FedEx’s share history has a 1.241x adjustment linked to that separation. Applying that factor to the old $1.45 rate gives an adjusted equivalent of roughly $1.17, so the new $1.22 payout is about 4.4% higher on a like-for-like basis.
Management describes it the same way. Claude Russ, interim CFO at the time of the fiscal fourth-quarter call, said FedEx “recently increased our dividend by 5% after adjusting for the FedEx Freight spin-off, making this the sixth consecutive annual dividend increase.” Shareholders received Freight stock in the spin-off, and the smaller per-share check reflects a smaller company. The data points to a raise.
The $4.88 forward dividend equals roughly 27% to 29% of management’s latest full-year adjusted EPS guidance of $16.90 to $18.10. That leaves most guided earnings for reinvestment, buybacks, and debt service.
Cash flow coverage is also wide. FedEx produced $4.7 billion in adjusted free cash flow in its most recent fiscal year, which management called “nearly 100% conversion from adjusted net income.” At the current rate across 236.67 million shares, the dividend costs about $1.15 billion a year. Operating cash flow was $8.93 billion against capital spending of $3.81 billion.
The balance sheet adds more protection. FedEx ended its fiscal year with $13.31 billion in cash and equivalents, and its pension plan was 105% funded. Its latest outlook includes buying back up to $1 billion of stock this year, with $1.3 billion left on its authorization. A company that can fund buybacks on top of the dividend pays shareholders from a position of strength.
The long-run record is strong. FedEx’s quarterly dividend rose from $0.05 in 2002 to $1.45 before the spin-off adjustment, and the payment stepped up in each of the last several annual increases, from $1.15 to $1.26, then $1.38, then $1.45.
Bull case for income investors: A leaner FedEx is growing. Fiscal fourth-quarter adjusted EPS of $6.31 beat the $5.95 consensus, and revenue rose 12.5% to $25.01 billion. Management’s latest outlook calls for about 11% revenue growth this year and targets $6 billion in adjusted free cash flow by 2029. With a forward P/E of 15, the stock prices in modest expectations, though shares are up 30.83% year to date, which helps explain the slim yield. Jim Cramer told Mad Money viewers that “Raj Subramaniam is killing it,” referring to the chief executive.
Risk to watch: Trade policy. FedEx is holding about $800 million in IEEPA tariff refunds for customers, and changing global trade rules could hit international volumes, which drive much of its profit.
United Parcel Service: An Ultra-High Yield Running Close to the Line
UPS pays $1.64 per quarter, or $6.56 annualized. At a recent price of $100.11, that yields about 6.55%. For a retiree, that check is hard to ignore. The trouble is how little cash is left after paying it.
The quarterly dividend has been held flat. UPS paid $1.64 on every payment from the first in 2025 through the latest, after earlier rates of $1.62 and $1.63. Before that, the history is excellent. The quarterly rate rose every year from $0.45 in 2009 to $1.64 in 2025, including a jump from $1.02 to $1.52 in 2022. The freeze breaks a long run of raises, and it signals that the board is focused on protecting the payout.
Free cash flow coverage is the central issue. Management’s latest outlook, raised with second-quarter results, calls for around $5.4 billion in dividends this year, subject to board approval, against free cash flow of approximately $5.5 billion. The cash payout ratio is about 98%. Over the opening six months, UPS generated $1.6 billion in free cash flow while paying $2.7 billion in dividends, although that figure includes one-time Driver Choice buyout payments.
The $6.56 dividend equals about 91% of this year’s adjusted EPS guidance of $7.22, and trailing GAAP EPS is only $5.38. One guest on CNBC’s Fast Money pointed out the same issue, calling a payout at “roughly 102% or 103% of free cash flow” a concern. A yield this close to its own cash coverage is exactly the setup we broke down in a free report on seven warning signs a big dividend is about to get cut.
The balance sheet gives some breathing room. UPS ended the second quarter with $4.7 billion in cash and no outstanding commercial paper. It is also making a $1.3 billion pension contribution and spending about $3 billion on capital projects this year, so cash is spoken for.
Bull case for income investors: The painful part of the turnaround may be behind it. UPS finished reducing volume from its largest customer and expects about $3 billion in transformation benefits this year. Second-quarter adjusted EPS of $1.76 beat the $1.66 consensus, revenue rose 7.6%, and consolidated operating margin expanded 40 basis points to 9.2%. Carol Tomé, chief executive, said, “We now have a leaner, more automated, more agile network that will deliver operating leverage as volume grows.” If margins keep expanding, the payout ratio falls without any dividend cut. The stock trades at a forward P/E of 12, and while shares are down 37.8% over five years, they have gained 22.67% over the past year.
Risk to watch: Cost inflation against a thin cushion. Fuel costs rose 60.4% year over year in the second quarter, and purchased transportation costs increased 26.4%. With dividends absorbing nearly all free cash flow, any lasting cost spike shows up directly in coverage.
Durable Income Favors FedEx’s Leaner Payout
FedEx and UPS remain the two dominant U.S. parcel dividend plays, and they tell very different stories. FedEx is leaner after the spin-off, pays out under 30% of guided earnings, and raised its adjusted dividend for a sixth straight year. UPS pays the far bigger check, but with roughly 98% of free cash flow going to the dividend, it depends on its transformation continuing to deliver. On durability, FedEx’s dividend is the stronger of the two, while UPS is the higher-income choice for investors willing to rely on the turnaround.
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Chris Lange is a financial and geopolitical writer with more than a decade of experience covering a myriad of topics. He has published thousands of articles for 24/7 Wall St., with past coverage focused heavily on stocks, IPOs, healthcare, defense, global affairs, and technology.
His work has been quoted, or referenced by a number of outlets including Business Insider, USA Today, Yahoo Finance, MSN, The Motley Fool, and many other publications. A graduate of Southwestern University, he studied business with a focus on investments and has previous experience in banking and startups.
When not reading or writing the news, he is following his passion for Lacrosse, playing chess, or building solar projects with his dad.
