Editor’s note: This story was previously published in March 2019. It has since been updated and republished.
Despite common economic challenges, services stocks present a viable opportunity. The most obvious tailwind is that American society mostly transitioned to a service-based economy. According to the International Trade Administration, 80% of private-sector jobs are levered to the service industry. More critically, we’re really good at what we do.
For the past year, President Donald Trump complained bitterly about trade-imbalances with other nations, particularly China. However, the Trump administration never says a word about the services trade, where we enjoy a robust surplus. Naturally, this dynamic boosts the case for services stocks.
Another favorable factor is that several publicly traded companies in this sector are also dividend stocks. During uncertain phases, these passive-income generating names provide practically-guaranteed returns. Additionally, dividend-payers tend to perform better during bear markets.
Finally, the service sector covers a wide range of opportunities. From retail to entertainment to communications, you’ll have no shortage of options. Here are seven services stocks that will generate consistent, passive income for your portfolio:
United Parcel Service (UPS)
Few service-based companies offer as much upside potential as e-commerce firms. However, popular names like Amazon (NASDAQ:AMZN) are not dividend stocks, but rather, operate purely on a capital-gains basis. So the next best thing is the transportation middleman, namely United Parcel Service (NYSE:UPS).
Of course, the immediate criticism is that Amazon’s venture into in-house product mailing solutions will completely disrupt UPS stock. Certainly, the situation looks bad for the courier. However, UPS responded with their own e-fulfillment service, and it has more credibility than Amazon can dream about.
While I respect the e-commerce giant, UPS has an established transportation network. In terms of scales of economy, UPS stock easily wins out. Plus, the company pays out a generous dividend yield at 4.2%. You’re just not going to get that with most services stocks levered purely to e-commerce.
Penske Automotive Group (PAG)
With the advent and later dominance of ride-sharing apps like Uber and Lyft, the concept of buying cars is steadily becoming archaic. In my first-ever Uber ride, my driver told me his personal forecast: people will stop purchasing cars and transition to ride-sharing full-time.
If such a prediction comes true, services stocks like Penske Automotive Group (NYSE:PAG) would simply implode. Although I’m not going to necessarily disagree with my driver — gotta keep my five-star rating! — the automotive still breathes.
One of the main factors keeping PAG stock in the running is practicality. Sure, ride-sharing apps have added options to the mix. However, nothing beats the convenience and cost-savings of driving yourself to your desired destination.
With Penske’s massive dealership network, they consolidate whatever sales opportunities exist, eating alive the small guys. This stinks if you’re on the receiving end of this tactic. However, for stakeholders in PAG stock, they’re not complaining, especially because of its 3.54% yield.
H&R Block (HRB)
All services stocks provide important, and often necessary functions to society. However, no one has such an extreme love-hate dynamic like H&R Block (NYSE:HRB). Tax season is always a difficult time for families this time of year. Even if you’re due for a refund, you don’t like the paperwork involved.
Of course, HRB stock makes a case for itself by alleviating this pressure for many families. This year, and moving forward, H&R Block presents an even more valuable service. That’s because several taxpayers complained about the complexities and the surprise tax hit they incurred due to new laws.
Moreover, the “gig economy” reshaped the labor force, with many (usually young) workers eschewing the corporate ladder for professional autonomy. Usually, though, this implies that these workers are independent contractors, which is a much more complicated tax process than being a run-of-the-mill employee.
As such, you can expect HRB stock to significantly rise higher. And if not, the company is among the higher-paying dividend stocks, with a 3.68% yield.
I’m usually not into dividend stocks as they don’t fit my risk-taking personality. However, I recently took a shot with AT&T (NYSE:T). To summarize my bullish case for the telecom giant, I only need one “word,” which obviously is 5G.
However, AT&T isn’t the only name among services stocks to benefit from the next-generation in wireless technology. Rival Verizon Communications (NYSE:VZ) offers similar fundamental upside. In fact, Verizon won a critical PR victory, becoming the first commercial 5G provider. But other reasons exist why you should consider VZ stock.
While I’m partial to AT&T as an investment, the company has leveraged itself with aggressive acquisitions. If they don’t pan out, T shares will have serious problems. True, VZ stock isn’t perfect in this department, but it’s more stable than its core competitor.
For this stability, you’re not missing out that much in terms of passive income. Currently, Verizon offers a generous 4.09% dividend yield.
BG Staffing (BGSF)
Back during the “analog” days, services stocks in the staff-sourcing industry had substantial relevancy. Primarily, organizations like BG Staffing (NYSEAMERICAN:BGSF) provided a useful platform for young workers to get their first professional job. Also, they helped get transitioning workers back on their feet.
But with the rise of digitalization, along with social media outlets like Facebook (NASDAQ:FB), BGSF stock appears anachronistic. Often times, it’s not about what you know, but who you know. Recent technologies have only made this adage frustratingly accurate, depending on your perspective.
Still, I like BGSF stock and its chances to work its way out of its long-term funk. As I mentioned with H&R Block, BG Staffing benefits from the autonomous gig economy. Due to various factors such as changing employment dynamics, millennials won’t typically stay at one job indefinitely.
Admittedly, you’ll probably need patience with BGSF stock. But while you’re waiting, it’s one of the highest-paying dividend stocks, featuring a 5.95% yield.
Six Flags Entertainment (SIX)
Many investors have the mistaken impression that services stocks are boring; indeed, the name itself doesn’t generate much excitement. However, this sector doesn’t have to induce you into a coma, as renowned theme park Six Flags Entertainment (NYSE:SIX) proves.
Famous (or notorious) for its stomach-churning rides, SIX stock has generated long-term gains since its initial public offering. Unfortunately, recent market sessions have offered the same diabolical sensations as you would get riding the theme park’s “Full Throttle.”
Much of the volatility stems from SIX stock not recovering from its fourth-quarter 2018 earnings report. Although the company handily beat expectations for earnings per share, revenues disappointed against expectations. Six Flags delayed opening new locations in China due to its slowing economy.
However, don’t forget that revenues have consistently increased over the years. Furthermore, a possible trade deal between the U.S. and China would skyrocket SIX stock. Because of the risks involved, the company pays out a 6.37% dividend yield.
National CineMedia (NCMI)
I concede that National CineMedia (NASDAQ:NCMI) is a tough pill to swallow. The broader market downturn has disproportionately impacted services stocks related to the cineplex industry. After gaining 10% in March it gave back all of that and then some, losing about 4% compared with this time last year.
Given the popularity of streaming-entertainment firms like Netflix (NASDAQ:NFLX), National CineMedia seemingly has no chance. However, I’d advise against knee-jerk reactions when assessing NCMI stock. The box office, though a legacy institution, remains very much relevant in the 21st century.
How, you may ask? Simply, cineplex operators provide a social experience that streaming-related services stocks cannot. In dying shopping malls, astute developers refocused their efforts to provide event-based attractions for family-oriented Hispanic communities, to resounding successes. Against a comparable backdrop, NCMI stock may receive a similar lift.
If nothing else, National CineMedia is one of the most generous, legitimate dividend stocks. With a yield of 9.84%, it’s a risky but incredibly attractive proposition.
As of this writing, Josh Enomoto was long AT&T stock.