One of the best aspects of investing on Wall Street is that there's no one-size-fits-all strategy. There are stocks and/or exchange-traded funds that can be a fit for all investment approaches.
But when push comes to shove, it's pretty difficult to top the reliability of returns from dividend stocks over the long run.
A decade ago, the wealth management division of JPMorgan Chase released a report detailing the absolute outperformance of dividend stocks, relative to those that don't offer a payout. Over the 40 years examined (1972-2012), the companies that initiated and grew their payouts generated a robust annualized return of 9.5%. Meanwhile, the nonpayers trudged their way to an annualized return of 1.6% over the same four decades.
These results shouldn't be surprising. Companies that pay a regular dividend are usually profitable on a recurring basis, and they can offer transparent long-term growth outlooks. Perhaps most important, they're almost always time-tested. These are businesses investors don't have to worry about when fears of a U.S. recession arise.
Image source: Getty Images.
While there are well over 1,000 dividend-paying companies for investors to choose from, only a handful offer a reliable ultra-high-yield payout (an arbitrary phrase I'm using to denote stocks with yields of 7% or above).
What follows are three reliable ultra-high-yield dividend stocks, with an average yield of 7.76%, which are no-brainer buys in September.
AT&T: 7.58% yield
The first rock-solid ultra-high-yield income stock that can really pad your pocketbook is telecom company AT&T (T 1.02%). Given the struggles its share price has endured since the decade began, AT&T's yield has risen to nearly 7.6%.
The headwinds AT&T is contending with can be boiled down to two factors: opportunity and potential litigation. With regard to the former, AT&T is a mature (i.e., slow-growing) business in the tech space. When interest rates were near historic lows, investors opted for tech stocks that could pivot cheap borrowed capital into a double-digit growth rate. In other words, AT&T's slow-but-steady growth strategy made it Wall Street's chopped liver.
The more recent issue for AT&T is a report from The Wall Street Journal highlighting possible financial liabilities tied to its legacy use of lead-sheathed cables. While these are tangible concerns, neither is going to derail AT&T's operating momentum.
For example, AT&T may have no financial liabilities tied to its legacy lead-sheathed cables. Only a small portion of its network still uses these cables, and it would likely take the legal system years to establish financial culpability, if any exists.
What investors should be paying attention to is AT&T's three well-defined catalysts. First, there's the emergence of 5G, which is encouraging a steady device replacement cycle among consumers and businesses. While AT&T can benefit on the retail side of the equation, the bulk of its gains can be seen via increased data consumption. Data is the margin needle-mover for the company's wireless segment.
Secondly, AT&T's broadband segment has really perked up. The introduction of 5G download speeds is helping the company add more than 1 million net new broadband subscribers annually. Though broadband isn't the growth story it was two decades ago, it's still an amazing tool that encourages service bundling and lifts the company's operating cash flow.
Lastly, AT&T has predictability on its side. No matter what the U.S. economy throws at consumers, they're highly unlikely to give up their smartphone, or cancel their wireless service or internet access. The cash flow AT&T generates is highly transparent, which is what makes its supercharged payout so rock-solid.
Innovative Industrial Properties: 8.21% yield
A second reliable ultra-high-yield dividend stock that stands out as a no-brainer buy in September is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR -0.17%), which is commonly known as "IIP." Since introducing its quarterly distribution in June 2017, IIP's payout has grown by 1,100%!
IIPR Dividend data by YCharts.
If you thought telecom stocks have been left in the dust, take a gander at marijuana stocks since President Joe Biden took office in 2021. Hopes of cannabis reform were quickly dashed, which resulted in domestic and Canadian pot stocks getting smoked (pun fully intended). Without federal reform, multi-state operators (MSOs) have been entirely reliant on legalizations in individual states to expand.
What a marijuana REIT like Innovative Industrial Properties provides is a relatively safe way to take advantage of the long-term growth in cannabis use, without the unwelcome ups and downs of an industry that's still getting its feet wet.
As of June 30, 2023, IIP owned 108 properties spanning 8.9 million rentable square feet across 19 states. These properties are predominantly used for cultivating and/or processing medical cannabis.
The recurring advantage of IIP's operating model is predictability. For instance, the weighted-average remaining lease term on its properties is 14.9 years. By seeking out long-term tenants, IIP is locking in predictable adjusted funds from operations (AFFO) quarter after quarter.
To build on the above point, a whopping 99.9% of its operating portfolio is triple-net leased (also known as "NNN-leased"). With NNN leases, the onus of all property costs, such as maintenance, utilities, insurance, and property tax, falls to the tenant. While NNN leases often result in lower monthly rental income, it also relieves IIP of surprise expenses. Once again, we're talking about very predictable AFFO.
Furthermore, IIP has made big strides to overcome a short-lived wave of delinquencies among a handful of MSOs. A combination of property sales and reworked master lease agreements lifted the company's rent and property management fee collection rate to a hearty 97% in the June-ended quarter.
If you need one more good reason to buy IIP, consider its sale-leaseback program. As long as marijuana remains an illicit substance, MSOs will have spotty access to traditional banking services. IIP has stepped up by purchasing properties from MSOs for cash and immediately leasing the asset back to the seller. It's a win for MSOs, and it continues to land IIP long-term tenants.
Image source: Getty Images.
Enterprise Products Partners: 7.49% yield
The third reliable ultra-high-yield dividend stock that's a no-brainer buy in the month of September is none other than energy stock Enterprise Products Partners (EPD 0.45%). Enterprise has increased its base annual distribution for 25 consecutive years and is currently portioning out a 7.5% yield.
Undoubtedly, some fplks can't fathom the idea of "reliable" and "energy stock" being in the same sentence. After all, it was just three years ago that we witnessed West Texas Intermediate (WTI) crude oil futures plunge to as low as negative $40 per barrel. But thanks to the nature of Enterprise's business, the structure of its contracts, and macroeconomic factors, this company's payout is exceptionally safe.
Enterprise Products Partners is one of America's largest midstream energy companies. In other words, it's an energy middleman tasked with transporting and storing crude oil, natural gas, natural gas liquids, and various refined products. It operates more than 50,000 miles of transmission pipeline and can store over 260 million barrels of liquids, along with 14 billion cubic feet of natural gas.
Whereas a wildly vacillating spot price for WTI crude can meaningfully help or hurt drilling companies (i.e., the upstream segment), it's not much of an issue for Enterprise Products Partners. That's because around three-quarters of its gross operating margin derives from long-term, fixed-fee contracts. This type of contract removes inflation and spot-price volatility entirely from the equation, which makes Enterprise's operating cash flow quite predictable.
As I've stated in the past, there's nothing more important for midstream energy companies than having a transparent outlook for their cash flow. Being able to accurately predict how much cash they'll generate from operations has allowed Enterprise to spend big on new projects and make acquisitions, and increase its base annual distribution for a quarter of a century (and counting).
We're also seeing clear evidence that macroeconomic factors are a tailwind for the company. Russia's ongoing war with Ukraine has thrown Europe's long-term energy supply needs into question. Meanwhile, more than three years of capital underinvestment tied to the COVID-19 pandemic has tightened global oil supply. A tight market for supply is usually a recipe for higher spot prices. The higher WTI spot prices head, the more likely Enterprise is to land new lucrative contracts.
Enterprise Products Partners' stock is a bargain hiding in plain sight at just 10 times Wall Street's forward-year consensus earnings.
