Among the many strategies that can make investors handsomely richer, buying dividends stocks tends to be one of the most successful. Companies that pay a regular dividend often have transparent long-term outlooks, have proven their ability to navigate economic weakness, and, most importantly, are almost always profitable on a recurring basis.
To build on the above, dividend stocks are clear winners in the return department, when put head-to-head against nonpayers.
According to a study published in 2013 by J.P. Morgan Asset Management, a division of America's largest bank by assets, JPMorgan Chase, publicly traded companies that had initiated and grown their payouts between 1972 and 2012 generated a healthy annualized return of 9.5%. Meanwhile, publicly traded companies that didn't offer a payout produced an annualized return of only 1.6% over the same 40 years.
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While there are well over 1,000 publicly traded companies that offer dividends to their shareholders, not all income stocks are created equally. Since investment risk and yields tend to rise in tandem once yields are above 4%, it means investors need to be particularly careful when vetting high-yield and ultra-high-yield income stocks.
The good news is that super-safe annual dividend income from ultra-high-yield stocks can be found. Income investors need look no further than the iconic Dow Jones Industrial Average (^DJI 0.40%) to generate high-octane income.
The 127-year-old Dow Jones comprises 30 multinational, time-tested businesses, 27 of which pay a regular dividend, and six of which are sporting high-yield dividends of 4% and above. Two of these six Dow stocks offer truly safe dividend income that can line your pocketbook.
If you want $1,000 in super-safe annual dividend income, simply invest $13,750 (split equally) into the following two ultra-high-yield Dow stocks, which sport a hearty average yield of 7.29%.
Verizon Communications: 8.09% yield
The first supercharged dividend stock that can help income seekers generate $1,000 in exceptionally safe annual dividend income from an initial investment of $13,750 (split equally) is telecom giant Verizon Communications (VZ 1.17%).
With Verizon's share price losing nearly half of its value since the start of this decade, it's not a surprise to see its yield climb to north of 8%, as of the closing bell on July 18. The poor performance of the company's stock can be explained by two factors.
To start with, Verizon is a mature business with a low-single-digit growth rate. More than a decade of historically low interest rates fueled growth stocks, which meant slow growers like Verizon were mostly overlooked by Wall Street and everyday investors.
More recently, Verizon's stock has come under fire following an investigation and report by The Wall Street Journal, which detailed possible environmental and financial liabilities tied to lead-sheathed cables in its network. Wall Street has never been a fan of uncertainty, and the potential for financial liabilities tied to these lead-sheathed cables is apparently concerning some investors.
However, any financial culpability for lead-sheathed cables could be many years away, if the company is found to have any liability at all. Further, Verizon has noted that only a small percentage of its network utilizes lead-sheathed cables today, and that an investigation would be launched as to the validity of the claims made by the WSJ.
What's far more important for investors to recognize is that telecom services have somewhat evolved into necessities. No matter how poorly the U.S. economy or stock market perform, consumers and businesses aren't expected to give up their smartphones, wireless service, or access to the internet just to save a few dollars. This is why Verizon has such a low churn rate and brings in highly predictable operating cash flow.
Despite being a mature business, Verizon does have two core catalysts capable of modestly expanding its organic growth rate in the coming years. The first of these growth drivers is the 5G revolution. Since it took telecom companies about a decade to meaningfully upgrade wireless download speeds, the introduction of 5G speeds should encourage a steady device replacement cycle. For Verizon, it means an uptick in high-margin data consumption.
The other big catalyst for Verizon is its resurgent broadband segment. Gobbling up mid-band spectrum in 2021 is now allowing the company to offer 5G broadband services to residential and enterprise customers. The 437,000 broadband net additions in the March-ended quarter marked Verizon's top quarter for broadband net adds in more than a decade.
With a reasonable payout ratio of 56%, Verizon's 8.1% yield looks rock-solid for income seekers.
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Walgreens Boots Alliance: 6.49% yield
The second ultra-high-yield Dow stock that can produce $1,000 in super-safe annual dividend income with an initial investment of $13,750 (split equally) is pharmacy chain Walgreens Boots Alliance (WBA 0.57%). Walgreens has increased its base annual payout for 47 consecutive years, and its current 6.5% yield is more than four times higher than the 1.47% yield of the benchmark S&P 500.
Similar to Verizon, Walgreens Boots Alliances' high yield is a function of a sizable payout amid a large drop in its share price. On a trailing-five-year basis, Walgreens' shares have dipped by 55%. Part of the blame goes to the COVID-19 pandemic, which led to lockdowns that stymied foot traffic into Walgreens' stores. Large-scale pharmacies like Walgreens generate most of their revenue from their brick-and-mortar stores.
The other issue for Walgreens had been its reluctance to move away from horizontal expansion. In other words, Walgreens focused on increasing its pharmacy footprint for years, while ignoring other revenue-generating opportunities.
The good news for investors is that Walgreens remains quite profitable on an adjusted basis, and management is currently implementing a multitude of growth initiatives designed to boost sales and lift the company's operating margin.
One of the most exciting aspects of Walgreens' turnaround plan is its vertical push into healthcare services. It's become a majority investor in VillageMD, and the duo have plans to open 1,000 full-service clinics in over 30 U.S. markets by the end of 2027. For context, more than 200 of these VillageMD clinics, co-located at Walgreens stores, have already opened. Having physicians on site is a differentiator that can drive repeat business and allow the company to win back customers at the grassroots level.
Another way management is aiming to improve the company's organic growth rate and lift its operating margin is through investments in technology. Walgreens is freely spending on digitization initiatives designed to streamline its supply chain and expand its online presence. Even though online sales account for a small percentage of total sales, direct-to-consumer represents an easy way for the company to improve its organic growth rate.
In addition to these growth initiatives, Walgreens Boots Alliance has implemented an assortment of cost-cutting measures designed to boost its operating efficiency. Management is targeting $4.1 billion in aggregate annual cost savings -- up from $2 billion in fiscal 2022 -- by the end of fiscal 2024 (Aug. 31, 2024), and has sold noncore assets, such as its wholesale drug business, to raise capital in order to reduce its outstanding debt.
Lastly, don't forget that healthcare stocks are generally defensive. Since we can't control when we become ill, demand for prescription drugs and healthcare services remains relatively constant in any economic environment. That's good news for Walgreens' operating cash flow.
Sporting a payout ratio of just 48%, Walgreens Boots Alliance's payout can be counted on to deliver for long-term income seekers.
