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3 Ultra-High-Yield Dividend Stocks With 51% to 56% Upside in 2022, According to Wall Street

By Sean Williams – Dec 23, 2021 at 5:06AM

Key Points

  • Dividend stocks have a long history of handily outperforming non-dividend-paying companies.
  • Wall Street's high-water price target suggests these top-tier income stocks could make investors a lot richer.

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These supercharged income stocks, with yields ranging from 8.6% to 13.2%, could be big winners in the new year.

When the curtain closes on 2021 in a little over a week, Wall Street is liable to uncork the champagne. Despite recent volatility, it's been another fantastic year for the broad market indexes. In particular, the benchmark S&P 500 has rallied 23% year to date through this past weekend.

But for certain stocks, there's still plenty of perceived upside to come, at least according to select Wall Street analysts and investment banks.

A person holding an assortment of folded cash bills by their fingertips.

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A trio of ultra-high-yield income stocks have Wall Street's attention

Although growth stocks have been the apple of investors' eye for more than a decade, dividend stocks are really coming into focus. Not only are dividend-paying companies often profitable and time-tested, but their track record clearly demonstrates they outperform.

Back in 2013, J.P. Morgan Asset Management, a division of banking giant JPMorgan Chase, released a report that compared the performance of stocks that initiated and grew their dividend to stocks that didn't offer a payout over four decades (1972-2012). The result? The dividend-paying stocks ran circles around the non-dividend payers on an annualized basis over 40 years (9.5% return vs. 1.6% return).

The only real issue income investors typically run into is netting the highest payout possible with the least amount of risk. That's because risk and yield tend to be correlated once you hit high-yield territory (4% and up). Since yield is a function of payout relative to the price, a company with a failing business model and falling share price can offer the impression of a juicy yield. This is called a yield trap.

But according to a handful of analysts and investment banks, there exists a trio of ultra-high-yield dividend stocks (a figure I'm arbitrarily defining as a yield of 8% or higher) that offers upside ranging from 51% to 56% in 2022.

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Enterprise Products Partners: 8.6% yield with 52% implied upside in 2022

The first ultra-high-yield stock offering a drool-worthy payout and significant upside potential is oil and gas company Enterprise Products Partners (EPD 0.63%). Analyst T.J. Schultz at RBC Capital recently set a $32 price target on the company, which, based on its closing price last Friday, implies an up to 52% increase over the coming 12 months. 

Some folks might be a bit leery about putting their money to work in oil stocks, especially after what happened with crude prices last year. The coronavirus pandemic led to a historic drawdown in crude oil demand that ultimately tanked prices for a period of time. However, Enterprise Products Partners didn't deal with these issues, thanks to it being a midstream company.

Midstream companies operate transmission pipelines, storage tanks, and sometimes processing/refining facilities for the oil and natural gas industry. Whereas drillers are directly affected by declines in the price of crude oil and natural gas, midstream companies like Enterprise Products Partners have take-or-pay contracts firmly in place that provide predictable volume and pricing commitments from upstream companies.

In fact, Enterprise Products Partners performed so well during the pandemic that its distribution coverage ratio never dipped below 1.6. The distribution coverage ratio measures the amount of annual distributable cash flow in relation to the amount of cash that's actually distributed to investors. Anything below 1 would imply an unsustainable payout.

The company is currently riding a 23-year streak of increasing its base annual payout, and it'll likely benefit from increased infrastructure demand with West Texas Intermediate crude working its way back to $70 a barrel. Hitting $32 next year isn't out of the question.

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Mobile TeleSystems: 13.2% yield with 51% implied upside in 2022

Another ultra-high-yield stock clearly on Wall Street's radar is Russian telecom company Mobile TeleSystems (MBT). Based on the currency-converted high-water price target from analysts of $11.66, MTS, as the company is better known, offers implied upside of 51% in the coming year.

Before diving into what makes MTS tick, keep in mind that while it does have an insanely high yield of 13.2%, the company's payout fluctuates based on its operating performance. Nevertheless, Mobile TeleSystems has averaged close to a 9% payout for more than a half decade.

MTS' primary growth driver has long been its telecom segment. Although Russia already boasts high wireless saturation rates, the company has plenty of opportunity to boost sales and margins by expanding both the reach and speed of its wireless infrastructure. There are ample opportunities to generate added revenue from device upgrades to 5G in major cities, as well as in expanding 4G wireless reach in Russia's smaller cities.

What you might not realize about Mobile TeleSystems is that it's become something of a conglomerate. With wireless growth relatively tame, MTS has pushed into new channels to boost sales and keep users loyal to its ecosystem. These new channels include banking, paid and streaming television, and cloud services.

Although these ancillary channels currently make up a small portion of total revenue, their growth rate should raise some eyebrows. The company's total paid TV subscribers jumped by 2.2 million (39%) in the third quarter, with over-the-top subscribers nearly doubling to 3.5 million. As for MTS Bank, gross loans jumped 54.3% from the prior-year period in Q3 2021, with operating income surging 50%. There's no reason not to expect these ancillary segments to lift the company's organic growth, as well as improve brand loyalty among ecosystem customers.

A person working from home with an open laptop on their lap and a smartphone in hand.

Image source: Getty Images.

AT&T: 8.8% yield with 56% implied upside in 2022

A final ultra-high-yield dividend stock with mammoth upside in 2022 is telecom kingpin AT&T (T 1.50%). Analyst Bryan Kraft at Deutsche Bank raised AT&T's price target in late July from $34 to $37.  If this share price were to be achieved, investors would net a 56% return from where shares closed this past weekend.

The most obvious catalyst for AT&T is the ongoing rollout of 5G wireless infrastructure. It's been about a decade since wireless download speeds were dramatically increased. Upgrading 5G infrastructure should encourage consumers and businesses to replace their devices to take advantage of faster download speeds. Neither these upgrades nor the product replacement cycle will happen overnight. This gives AT&T's data-driven wireless segment an opportunity to generate consistent organic growth over the next five years.

However, the bigger long-term driver for the company might just be the spinoff of its content arm WarnerMedia. As announced in May, the plan is to merge WarnerMedia with Discovery to create a new media entity that offers more in the way of original and sports-based programming. Assuming the deal closes, the combined company should have more than 85 million subscribers and will push for at least $3 billion in annual cost synergies.

Perhaps most importantly, spinning off WarnerMedia will allow AT&T to focus on cost-cutting and debt reduction. Though the company is sporting a ridiculously high 8.8% yield at the moment, management's targeted payout ratio following the spinoff will reduce to between 40% and 43% -- probably equating to a 5% yield.

Income investors shouldn't let this payout reduction scare them away. Their continued ownership in AT&T will provide an above-average payout, and they'll also hold a stake in a new content company with impressive growth prospects.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Sean Williams owns AT&T. The Motley Fool recommends Discovery (C shares) and Enterprise Products Partners. The Motley Fool has a disclosure policy.

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