Ultra-high-yield dividend stocks can be superb additions to a well-rounded portfolio. However, there are considerable risks associated with most stocks offering yields above the 7% mark. An elevated yield can be red flag indicating that a company is under financial duress or facing an important new competitive threat. As a result, investors should always carefully vet unusually rich income plays before hitting the buy button.
Which ultra-high-yield dividend stocks stand out as compelling buys right now? Verizon Communications (VZ 1.17%) and Altria (MO -0.37%) are two stocks with yields well north of 7% presently. Better still, both companies boast strong free cash flow, outstanding track records of rewarding loyal shareholders with regular dividend increases, and stable long-term outlooks.
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Let's take a closer look at each of these stocks and see why they are attractive dividend plays.
Verizon Communications: A 7.52% annualized yield
Verizon is a telecom giant with top-shelf market positions in both the wireless and broadband segments. At current levels, the company offers a 7.56% annualized dividend yield, which is well supported by earnings and free cash flow. Underscoring this point, Verizon sports a fairly low payout ratio of 52.2%. In 2022, the telecom behemoth generated $14.1 billion in free cash flow and paid out $10.8 billion in dividends to shareholders.
What's more, Verizon's stock is attractively priced right now. As a result of its heavy debt load, high spend on network infrastructure, and overhang from legacy infrastructure (lead cables), the telecom giant's shares have declined by nearly 12% year to date as of this writing. Consequently, Verizon's stock is trading at under 8 times projected earnings, which is a bargain for a large-cap telecom stock with an enormous dividend yield.
The downside is that the intense competition among the big three wireless carriers in the U.S. (Verizon, AT&T, and T-Mobile) is expected to limit the industry's growth prospects. Verizon stock, in turn, is attractive primarily for its prospects as a top income and value play.
Altria: An 8.86% annualized yield
Altria is the largest tobacco company in the United States. It owns some of the most popular cigarette brands in the world, such as Marlboro, which holds a market share of approximately 50% in its category. Altria also has a presence in other tobacco and tobacco-adjacent categories, such as smokeless tobacco (Copenhagen, Skoal), cigars (Black & Mild), and oral nicotine pouches (On!).
Altria faces several challenges in its core business, including declining smoking rates, regulatory pressures, litigation risks, and competition from alternative products. However, the company has been able to maintain its profitability and cash flow by raising prices, cutting costs, and expanding its margins.
Altria has raised its dividend 58 times in the past 54 years and it currently pays an annualized yield of 8.9%. That being said, the tobacco titan does have a rather concerning payout ratio of 98.9%, which is definitely on the high side. However, Altria's dividend ought to be sustainable given the overall upward trend in its free cash flow over the past 10 years, as well as the company's long history of delivering respectable levels of both bottom- and top-line growth.
MO Free Cash Flow data by YCharts
All told, Altria stock stands out as an attractive and reliable income play despite the long-term headwinds facing its business.
