While there are a lot of strategies that can make investors richer on Wall Street, few are more successful than investing in dividend stocks over the long term.
Approximately 10 years ago, J.P. Morgan Asset Management, a division of money-center bank JPMorgan Chase, released a report that compared the annualized returns of publicly traded companies initiating and growing their payouts between 1972 and 2012 to those that didn't offer a dividend over the same timeline. The latter trudged to an average annual return of just 1.6% over 40 years. Meanwhile, the dividend-paying companies rocketed to an annualized return of 9.5% over four decades.
These results shouldn't be all that surprising. Companies that pay a regular dividend are typically profitable on a recurring basis, offer clear long-term growth outlooks, and are time-tested. They're just the type of companies we'd expect to steadily grow in value over time.
Image source: Getty Images.
However, dividend stocks also create a bit of a dilemma. Investors want the highest yield possible, but also prefer minimal risk. Studies have shown that once yields reach 4% and above, risk and yield tend to correlate. In other words, high-yield stocks require a lot of extra vetting and can sometimes be more trouble than they worth.
But this isn't always the case. Sometimes ultra-high-yielding stocks -- an arbitrary phrase I'm using to describe income stocks with yields that are least four times higher than the S&P 500's yield of 1.47% -- can deliver big-time returns for their patient shareholders.
What follows are three phenomenal ultra-high-yield dividend stocks, with yields ranging from 6.4% to 14.6%, which are begging to be bought by opportunistic income seekers in August.
AT&T: 7.68% yield
The first supercharged income stock that stands out as a plain-as-day value for dividend investors is telecom giant AT&T (T 0.10%). Since yield is a function of payout relative to share price, AT&T's stock recently hitting a 31-year low has catapulted its yield to nearly 7.7%. While it's clear that the company's stock is currently broken, AT&T's operating model looks stronger than it's been in years.
NYSE: T
Key Data Points
One fairly obvious growth driver for the company is the rise of 5G. After a solid decade of 4G LTE download speeds, upgrading its infrastructure to support 5G wireless speeds should encourage a multiyear device replacement cycle. Though there is a retail boost to be had for AT&T, the real benefit should come in the form of an increase in data consumption by its customers. Data is the high-margin accelerator that drives its wireless segment.
AT&T has also seen a resurgence in its broadband growth. It's delivered 14 consecutive quarters with at least 200,000 net AT&T Fiber additions and is working on a five-year streak of at least 1 million annual net adds. Acquiring mid-band spectrum and using this spectrum to support 5G residential and enterprise broadband solutions appears to be paying off handsomely.
Despite telecom companies lugging around quite a bit of debt on their balance sheets, AT&T has done an admirable job of reducing its obligations. When it spun out WarnerMedia in April 2022, which was then subsequently merged with Discovery to create Warner Bros. Discovery, this new entity became responsible for certain lots of debt previously held by AT&T. All told, AT&T's net debt has declined from $169 billion to $132 billion between March 31, 2022 and June 30, 2023.
I'd also encourage investors to largely shrug off recent concerns about lead-sheathed cables. Even if AT&T has some financial liability tied to the use of lead-sheathed cables, it would take years to establish a figure in court. Further, lead-sheathed cables represent only a small portion of AT&T's network.
With AT&T's dividend looking sustainable, and shares trading at roughly 6 times Wall Street's current and forward-year earnings estimates, now looks like the ideal time for opportunistic investors to pounce.
NASDAQ: ARLP
Key Data Points
Alliance Resource Partners: 14.62% yield
A second phenomenal ultra-high-yield dividend stock that's begging to be bought in August is coal producer Alliance Resource Partners (ARLP 3.71%). Yes, Alliance Resource Partners is yielding 14.6%, and yes, I really did say "coal producer."
Though it seemed as if coal producers would be left for dead when the decade began, the COVID-19 pandemic has given the industry new life. More than three years of capital underinvestment by global energy majors, coupled with Russia's invasion/war with Ukraine, has put a tight lid on oil and natural gas supply. The one industry that's been able to meet the supply needs of emerging and developed nations is coal.
Aside from recognizing considerably higher per-ton pricing on the coal it's sold, what makes Alliance Resource Partners such a stellar company is the forward-thinking approach of its management team. This is a company that regularly locks in volume and price commitments up to four years in advance. As of the end of March 2023, it had approximately 94% of its 2023 production (at the midpoint) priced and committed, along with 63% of its expected 2024 production. Locking these commitments in is what helps the company generate such predictable operating cash flow.
To add to the above, Alliance Resource Partners has conservatively expanded its production. Whereas many of its peers buried themselves in debt, Alliance Resource has slow-stepped its production expansion and kept its net debt at reasonable levels -- $187.6 million, as of March 31, 2023. With more than $920 million in trailing-12-month operating cash flow, there's little concern about its ability to service and pay down its outstanding debt.
The icing on the cake for Alliance Resource Partners is that it also holds oil and natural gas royalties. If the price of these commodities increases, the expectation would be for its earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise, too. Given the supply constraints affecting the oil market globally, there's a reasonable chance EBITDA remains high for this segment.
A 14.6% yield and sub-4 price-to-earnings ratio, based on Wall Street's earnings-per-share forecasts in 2023 and 2024, makes Alliance Resource Partners a steal.
Image source: Getty Images.
Walgreens Boots Alliance: 6.44% yield
The third phenomenal ultra-high-yield dividend stock that's begging to be bought by opportunistic income seekers in August is none other than pharmacy chain Walgreens Boots Alliance (WBA +0.00%). Walgreens is riding a 47-year streak of raising its base annual payout, and its shares are currently yielding a hearty 6.4%.
Although Walgreens' stock chart over the past five years would seem to offer little hope to investors, management appears to be making all the right moves to get Walgreens back on track by mid-decade, if not well before.
After many years of horizontal expansion that saw Walgreens opening additional retail stores, the company is finally entering new verticals. The most exciting venture is its push into healthcare services. It's become a majority investor in VillageMD, with the duo opening more than 200 full-service clinics co-located in Walgreens' stores. By the end of 2027, around 1,000 of these physician-staffed clinics should be up and running in over 30 U.S. markets. Since these clinics are designed to handle more than just vaccines or a sniffle, they're perfectly positioned to draw in repeat patients.
NASDAQ: WBA
Key Data Points
We're also seeing Walgreens Boots Alliance actively investing in a variety of digital initiatives. It's completely revamped its supply chain and has not been shy about spending money to improve its online website. Even though pharmacy chains generate an overwhelming percentage of their sales in store, pushing the convenience of direct-to-consumer sales and drive-thru pickup is an easy way for Walgreens to lift its organic growth rate.
Amid this spending on growth initiatives and new verticals, Walgreens' management team also has a plan to trim costs. After meeting its goal of reducing its annual operating expenses by $2 billion a full year ahead of schedule, Walgreens is now targeting $4.1 billion in cumulative annual cost savings. Ultimately, this is a positive for the company's operating margin.
Though Walgreens' high-growth days have long since passed, investors are getting a stellar deal -- a little over 7 times current and forward-year earnings -- on a highly profitable, brand-name company whose growth rate should accelerate in the second half of the decade.
