All It Takes Is $4,500 Invested in This Dirt-Cheap Value Stock to Help Generate Over $100 in Passive Income per Year

Union Pacific (NYSE: UNP) stock pulled back after reporting third-quarter earnings and missing Wall Street estimates.

The company operates one of the largest railroads in North America with a focus West of the Mississippi River. Given its valuable infrastructure assets and limited competition, Union Pacific can be a reliable dividend stock despite the cyclical nature of the railroad industry.

With a 2.3% dividend yield, investors can expect a $4,500 investment in Union Pacific to generate at least $100 in passive income per year. Here's what's driving the sell-off in Union Pacific and whether the dividend stock is worth buying now.

Image source: Getty Images.

Union Pacific has been hit hard by macroeconomic challenges

Union Pacific stock is down a little over 8% in the last three years. One look at its results and it's easy to see why.

UNP data by YCharts.

Revenue is up modestly during this period, and operating margins have fallen. Inflation has impacted Union Pacific's costs, from relatively high fuel expenses to rising labor costs.

Railroads are a highly efficient way to ship goods on land. Union Pacific transports various bulk products, such as coal and grain. It also ships industrial products, such as aggregate used for construction, petroleum, petrochemicals, and premium products like automobiles.

The diverse revenue mix adds some diversification to Union Pacific's revenue stream, but the company is still cyclical in nature. When macroeconomic growth is humming along, demand for agricultural, industrial, material, and energy products can increase. But when the economy weakens, demand for these goods can decrease, which means less need for Union Pacific's services.

Still, railroads tend to have high-operating margins regardless of the economic cycle. Their main expenses are maintaining the rail network, labor, and fuel. Union Pacific plans to spend $3.4 billion in capital investments in 2024, including $2 billion on upgrading and replacing infrastructure, and $600 million on locomotives and equipment. For context, it set a capital-investment goal of $3.7 billion in 2023 and $3.4 billion in 2022.

Despite the importance of maintaining a safe and reliable network, these expenditures are relatively small in the grand scheme of Union Pacific's operating expenses.

Data source: Union Pacific.

As you can see in the table, Union Pacific is bringing in nearly 40 cents in operating income for every dollar in revenue. So although growth has stalled, Union Pacific is still a highly profitable business.

An inexpensive stock with a reliable dividend

Union Pacific has raised its dividend every year since 2008 and has paid dividends for 125 consecutive years, giving it quite an impressive track record for passive-income investors. But because Union Pacific's most-recent dividend raise was only 3% (and it made the raise halfway through 2024), it is only projected to pay $5.28 per share in dividends this year compared to $5.20 per share in 2023.

Union Pacific's dividend raises have been fairly disappointing in recent years, which makes sense given the low growth in the core business. Still, Union Pacific has an excellent dividend in terms of quality. The company sports a payout ratio just under 50%, indicating the dividend is affordable even if earnings fall. In addition to dividends, stock repurchases are a core component of the company's capital-return program. Over the last decade, it has raised its dividend by 168% and reduced its outstanding share count by 31.4%, which has allowed its earnings per share (EPS) to grow faster than net income.

Union Pacific is a fair value relative to historical levels. Its median price-to-earnings (P/E) ratio over the last three-to-10 years has ranged from 20.3 to 22.1. Its current P/E ratio is 21.2. Again, buybacks have helped keep the P/E ratio low despite slowing earnings growth.

A dividend stock you can count on

Union Pacific is a big and bulky business. There's only so much it can do when external factors are working against it. But even with slow growth, the company still generates plenty of profit to pay a growing dividend and buy back a considerable amount of stock.

Union Pacific may not have the highest yield at just 2.3%. But the affordability and track record of its dividend payment, paired with its reasonable valuation, make it a solid blue chip dividend stock for investors who care more about dividend quality than quantity.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Union Pacific. The Motley Fool has a disclosure policy.