When investors look back on the world's greatest investment portfolios and money managers, one constant often stands out: a focus on dividend stocks. While dividend stocks aren't flashy by any means, they offer a number of competitive advantages that result in superior long-term returns.
For example, dividend stocks are a beacon of profitability. By that I mean they're often time-tested businesses, and their management teams would be unwilling to continue paying out a portion of corporate profits if they didn't foresee continued profitability and growth. Although it's not always the case, dividend stocks more often than not can be purchased and forgotten about for years or decades.
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Dividend stocks can also help hedge against the inevitable downside of the stock market. No investor likes seeing paper losses in their portfolio, but a stock market correction of at least 10% has occurred, on average, every 1.86 years in the S&P 500 since 1950. Dividend payouts can help hedge against these downward moves and, hopefully, prevent long-term investors from making a rash decision by selling a fundamentally sound company.
Dividend payouts can also be reinvested into more shares of dividend-paying stock via a dividend reinvestment plan, or DRIP. By reinvesting your payouts, you'll grow the number of shares of dividend-paying stock you own, as well as the dividend payout you're entitled to. This strategy is what top-tier money managers often use to grow the wealth of their clients.
Lastly, it doesn't hurt that, historically, dividend-paying stocks have handily outperformed non-dividend-paying stocks.
Double your money quickly with this small basket of high-yield dividend stocks
But there's still risk involved with dividend stocks. Namely, the higher the yield, the higher the risk. Investors want as much income as possible, but minimizing risk isn't always easy.
There are, however, a handful of high-yield stocks that have the potential to put serious money in your pocket. If you were to invest your money equally into the following three high-yield dividend stocks, the average annual yield of 8.2% would double your initial investment in less than nine years.
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AT&T: 6.7% dividend yield
Check out the latest AT&T earnings call transcript.
I know what you're probably thinking, and I was in your shoes once as well. I heard the name AT&T (T 1.31%), and my eyelids began to droop as my brain became overwhelmed with the boringness of this business model. But times are changing, and AT&T is on the verge of yet another long-term growth cycle.
Recently, AT&T has begun rolling out its next-generation 5G networks in select cities, with broader rollouts expected in the years to come. These faster-speed networks should encourage consumers to upgrade their smartphones to devices that are compatible with 5G networks. This upgrade cycle is expected to boost high-margin data consumption and should, in all likelihood, improve loyalty and engagement with the brand.
Likewise, AT&T completed its acquisition of Time Warner in 2018, bringing the CNN, TBS, and TNT networks into its portfolio. These assets are expected to help it lure video subscribers away from its competitors, as well as lift AT&T's advertising pricing power. In short, AT&T is an operating cash flow juggernaut, and its projected payout ratio of 57% in 2019 implies that its dividend is safe for many years to come.
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Philip Morris International: 6.3% dividend yield
Check out the latest Philip Morris earnings call transcript.
I freely admit that the tobacco industry today is a shell of its former self in developed countries like the United States. But that's not necessarily an accurate descriptor for innovative global tobacco giants like Philip Morris International (PM +0.63%).
Though Philip Morris has seen continued weakness in cigarette shipment volumes, primarily as a result of weaker demand in developed countries, it has plenty of opportunity to grow in emerging markets where tobacco is still considered a luxury for burgeoning middle classes. Having operations in more than 180 countries diversifies its revenue stream and ensures that countries like Australia, which have cracked down on the tobacco industry, won't sink this ship. Plus, it doesn't hurt that the company's superior pricing power keeps pushing profits higher.
Philip Morris is also attempting to use innovation to drive results. Its IQOS heated tobacco device offers a means for consumers to receive nicotine without inhaling all of the added chemicals in a tobacco cigarette. IQOS was tested in Japan, with Wall Street noting that it flopped with consumers aged 45 and up. Yet I'd contend that the device did fine in terms of sales growth and penetration in a short amount of time. A simple adjustment of the company's marketing campaign may be all that's needed to boost sales and reach this older group of smokers. As IQOS expands globally, Philip Morris is proving that it's ready to turn over a new leaf.
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Alliance Resource Partners: 11.5% dividend yield
Check out the latest Alliance Resource Partners earnings call transcript.
Master limited partnership Alliance Resource Partners (ARLP 1.95%) is another high-yield dividend stock you can grow to love in an industry that's absolutely despised: coal.
Whereas many of Alliance Resource Partners' peers have struggled with falling coal prices and high debt levels, this hasn't been the case for this company. A conservative management team has amassed only $414 million in net debt and a total debt-to-equity of 36%, which is among the lowest in the industry. This gives Alliance Resource the financial flexibility to make acquisitions on the cheap.
The company also tends to avoid wholesale coal pricing on most of its production. That's because it secures supply and price agreements well in advance. With a typical year yielding around 40 million to 41 million tons of coal, Alliance Resource Partners had volume and price commitments totaling 32.9 million tons in 2019, 17.7 million tons in 2020, and 7.9 million tons in 2021, through Sept. 30, 2018.
Lastly, don't overlook this company's willingness to export overseas to meet demand. Back in 2016, exports made up a mid-single-digit percentage of sales. In 2018, they may have comprised around 27% of total sales, based on the midpoint of the company's guidance offered in the previous quarter. Coal may not make for an exciting investment, but for this company, at least, it's a very profitable one.
