There is no one-size-fits-all strategy to build wealth on Wall Street. Nevertheless, buying and holding dividend stocks over long periods tends to be highly successful.
Approximately 10 years ago, the wealth management division of leading money-center bank JPMorgan Chase released a report comparing the 40-year annualized returns (1972-2012) of publicly traded companies that initiated and grew their payouts to public companies that didn't pay dividends. The results of this comparison were exactly as you would imagine: a complete drubbing by the dividend-paying companies.
The income stocks generated a 9.5% annualized return over four decades. Meanwhile, the non-payers produced a meager 1.6% annualized return over the same span. Though dividend stocks may be viewed as "boring" by some investors, they're historically profitable and time-tested. In short, they have the tools and intangibles needed to increase in value over time.
Image source: Getty Images.
However, well over 1,000 public companies pay dividends, and no two are alike. Just as studies have shown that dividend stocks, collectively, crushed their non-paying peers over the long run, high-yielding income stocks come with greater investment risks than those with modest payouts.
But not all high-yield income stocks are necessarily trouble. Safe annual dividend income and a supercharged yield can be achieved together. If you want $300 in super-safe annual dividend income, simply invest $3,775 (split equally, three ways) into the following three ultra-high-yield stocks, which sport an average yield of nearly 8%.
Enterprise Products Partners: 7.46% yield
The first exceptionally safe high-octane dividend stock that can help you generate $300 in annual income from an initial investment of $3,775 (split three ways) is energy stock Enterprise Products Partners (EPD 0.45%). Enterprise has raised its base annual distribution for 25 consecutive years, is currently doling out a nearly 7.5% yield, and has collectively returned $49.7 billion to shareholders, including share repurchases, since its initial public offering in 1998.
Chances are some investors will be hesitant to put their money to work in energy stocks after what happened to oil and natural gas companies during the early stages of the COVID-19 pandemic. Historic demand drawdowns sent the spot price of crude oil and natural gas plummeting, which walloped drilling companies. However, Enterprise Products Partners was largely protected from this tumult.
Enterprise is one of the nation's largest midstream operators. It owns and operates more than 50,000 miles of transmission pipeline and can store over 260 million barrels of liquids and refined product. In short, it's an energy middleman.
The operating advantage of being an energy middleman can be seen in the company's contracts with upstream drillers. The vast majority of the deals Enterprise works out with drilling companies are long-term and fixed-fee.
Being fixed-fee removes the effects of inflation and spot-price vacillations from the equation. In other words, it means the company's cash flow from operations is highly predictable from one year to the next. This cash flow transparency is incredibly important for a company outlaying capital for new projects, acquisitions, and its distribution.
Speaking of new projects, Enterprise Products Partners saw more than $2.5 billion worth of projects placed into service since April 1, 2023, and has $4.1 billion worth of approved projects currently under construction. These projects, primarily focused on expanding its natural gas liquids exposure, should all be up and running by no later than the first half of 2026.
The cherry on top for income seekers is that Enterprise Products Partners' distribution coverage ratio (DCR) has never been a concern. The DCR is calculated by dividing the distributable cash flow a company generates by the distribution to investors. A figure of 1 or lower would signal an unsustainable payout. During the worst of the pandemic, Enterprise's DCR never fell below 1.6. This company's distribution is as rock-solid as they come in the energy sector.
Altria Group: 8.59% yield
A second supercharged income stock that can help you bring in $300 in super-safe annual dividend income from a starting investment of $3,775 (split equally, three ways) is tobacco giant Altria Group (MO -0.37%). Altria is parsing out a roughly 8.6% yield and has increased its payout a staggering 57 times over the past 53 years.
To address the elephant in the room, tobacco stocks aren't the growth story they once were, and they are facing tangible headwinds. Altria, which operates in the U.S., has seen domestic adult smoking rates decline from around 42% in the mid-1960s to just 11.5% in 2021, according to the Centers for Disease Control and Prevention. With the American public aware of the long-term health effects of smoking tobacco products, usage rates have been on a fairly steady decline.
But not even a major decline in U.S. adult smoking rates has been able to derail Altria. One reason for its continued success is the company's exceptional pricing power. Tobacco products contain nicotine, which is an addictive chemical. Altria is able to take advantage of this lure for nicotine products by increasing prices on its premium (Marlboro) and discount brands. Even with cigarette shipments declining, higher price points can more than make up for the loss of new or existing users.
However, Altria is also looking to bolster its long-term growth prospects by investing in a smokeless future. In June, the company closed a $2.75 billion deal to acquire NJOY Holdings.
Unlike the vast majority of e-vapor products on the market today, NJOY has received a marketing granted order (MGO) from the U.S. Food and Drug Administration (FDA) for a half-dozen of its products and devices. The FDA oversees the e-vape industry, and there are no guarantees that non-MGO products will continue to be sold.
Further, Altria Group invested in Canadian marijuana stock Cronos Group in 2019. Though Altria, in hindsight, overpaid for its equity stake in Cronos, the company nevertheless has a pathway to enter the North American cannabis market if and when the U.S. federal government changes its stance on marijuana's scheduling.
Altria Group may not be the growth story it once was, but management's shareholder-friendly strategy should see the company's yield remain around 8%, if not higher.
Image source: Getty Images.
Verizon Communications: 7.82% yield
The third ultra-high-yield dividend stock that can generate $300 in super-safe annual dividend income from an initial investment of $3,775 (split equally, three ways) is telecom stock Verizon Communications (VZ 1.17%). Verizon's 7.8% yield is the highest it's been since the company began paying a dividend more than three decades ago.
The biggest issue Verizon is contending with at the moment is the potential that it may have financial liability tied to its legacy usage of lead-sheathed cables in its network. Estimates on the liability Verizon and other legacy carriers may face have been all over the map.
However, this concern looks to be overblown, which has created quite the opportunity for long-term investors and income seekers. Verizon has stated that lead-sheathed cables comprise a very small portion of its existing network. Further, any financial liability would likely take years to be determined in court.
Instead of focusing on what-ifs, I'd encourage investors to pay attention to the company's two tangible catalysts. The first is the shift to 5G, which should entice consumers and businesses to upgrade their wireless devices. While this should result in a retail sales bump for Verizon, the meaningful benefit comes in the form of an increase in data consumption. Data is a high-margin driver for Verizon's wireless division.
The other surprising catalyst for Verizon is its broadband segment. Verizon spending a small fortune on 5G mid-band spectrum in 2021, coupled with the move to 5G download speeds, has led to three consecutive quarters of more than 400,000 net broadband additions. Broadband is a source of consistent cash flow for the company and should help to encourage high-margin service bundling.
Lastly, don't overlook the fact that Verizon provides what might as well be considered a necessity service. No matter how poorly the U.S. economy performs, consumers are unlikely to give up their smartphones, wireless access, or the ability to use the internet. This consistency of cash flow is what makes Verizon such a rock-solid dividend stock.
