While there are a lot of ways to make money on Wall Street, few strategies offer superior long-term returns quite like buying dividend stocks.
Approximately 10 years ago, the wealth management division of banking giant JPMorgan Chase issued a report that compared the performance of publicly traded companies that didn't offer a dividend to those that initiated and grew their payouts over the course of 40 years (1972-2012). Predictability, the income stocks crushed the nonpayers in the return column: 9.5% annualized over four decades, compared to 1.6% annualized over the same timeline for the nonpayers.
Since dividend-paying companies are typically profitable on a recurring basis, can provide transparent long-term growth outlooks, and have often demonstrated their ability to navigate difficult economic environments, they're perfectly suited to increase in value over the long run.
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The biggest challenge for income seekers is simply avoiding a potential yield trap -- i.e., a struggling company with an unsustainable high yield. Studies have shown that investment risk tends to go up once yields top 4%.
But this doesn't mean all high-yield stocks are trouble. Rather, it signals that more vetting needs to be done on companies with supercharged payouts to ensure they can sustain them. Thankfully for income seekers, there are top-notch, time-tested dividend stocks that can safely deliver for their shareholders.
For example, if you want to take home $1,000 in super-safe annual dividend income, all you'd need to do is invest $10,375 (split equally, three ways) into the following three time-tested, ultra-high-yield stocks, which are currently sporting an average yield of 9.65%.
AT&T: 7.29% yield
The first time-tested, ultra-high-yield stock that can deliver exceptionally safe high-octane income is none other than telecom company AT&T (T 1.02%). Its $1.11 base annual payout works out to a healthy yield of 7.29% -- about five times higher than the current yield (1.45%) of the S&P 500.
Shares of AT&T have come under pressure for two reasons: debt and the prospect of litigation.
With regard to the former, AT&T closed out the June quarter with $143.3 billion in total debt. That's a hefty sum, considering the Federal Reserve undertook its most aggressive rate-hiking cycle in four decades. There appears to be some degree of worry that future refinancings could be costlier for the company.
The other issue for AT&T concerns a report from The Wall Street Journal that highlights legacy telecom's usage of lead-sheathed cables. The WSJ report suggests that legacy operators may face billions in eventual replacement/environmental costs.
While these are both tangible issues, they make a mountain out of a molehill. For instance, lead-clad cables make up a small percentage of the cables in AT&T's network today. Even if telecom operators are eventually found liable for replacement/environmental costs, this will take years to determine in court.
Furthermore, AT&T has made significant progress with its balance sheet since spinning off WarnerMedia in April 2022. When WarnerMedia was subsequently merged with Discovery to create a new media entity, Warner Bros. Discovery, AT&T received approximately $40.4 billion in considerations, which included the new entity taking on certain lots of debt, as well as AT&T receiving cash. In a span of 15 months (March 31, 2022-June 30, 2023), AT&T's net debt has declined by $37 billion to $132 billion. It has more financial flexibility now than it's had in years.
AT&T's core operations are headed in the right direction, too. The 5G revolution is encouraging users to consume more data, and data is the primary margin driver for AT&T's wireless division. Meanwhile, AT&T is using 5G download speeds as a dangling carrot to boost service bundling and add to its steadily growing broadband subscriber count.
Altria Group: 9.01% yield
A second time-tested, ultra-high-yield stock that can help you generate $1,000 in super-safe annual dividend income from a starter investment of $10,375 (split equally, three ways) is tobacco stock Altria Group (MO -0.37%).
It's no secret that the U.S. adult smoking rate has been declining since the mid-1960s. With consumers becoming increasingly aware of the negative long-term health consequences of smoking tobacco products, more and more have chosen to quit. That's been a clear impediment to Altria's once-stellar growth rate. But even with these challenges, Altria brings well-defined competitive advantages to the table for its shareholders.
The one advantage that no company can take away from Altria is its pricing power. Tobacco products contain nicotine, which is an addictive chemical. To make up for modestly lower cigarette shipments as adult-use smoking rates have declined, Altria has turned to price hikes. Lifting its prices is made even easier, with its premium Marlboro brand accounting for a whopping 42% of cigarette retail share in the first half of 2023.
Altria Group has also not been afraid to aggressively invest in other businesses, or outright acquire them, to expand its revenue stream beyond smokable tobacco products. A perfect example of this is the recent closing of its $2.75 billion deal to buy NJOY Holdings. NJOY has received around a half-dozen marketing granted orders (MGOs) from the U.S. Food and Drug Administration for its electronic vapor products. By comparison, most of the e-vapor products on shelves today don't have MGOs and could, in theory, eventually be pulled from retail sale.
Mature businesses like Altria typically lean on share repurchases as a way to reward investors. In 2022, the company completed a $3.5 billion share buyback program, and followed this up with a $1 billion stock repurchase program. For companies with steady or growing net income (like Altria), reducing their outstanding share count via buybacks can have a positive impact on earnings per share. In other words, it can make an already inexpensive stock that much more attractive.
The icing on the cake here is that Altria has increased its payout 57 times over the past 53 years. Its 9% yield is about as rock-solid as they come.
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Annaly Capital Management: 12.64% yield
The third time-tested, ultra-high-yield stock that can allow you to bring home $1,000 in super-safe annual dividend income from an initial investment of $10,375 (split equally, three ways) is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 1.02%). Since its initial public offering in 1997, Annaly has paid more than $24 billion in dividends, and has regularly supported a double-digit yield. In short, its 12.6% yield isn't out of the ordinary.
The biggest issue for Annaly Capital is that the entire mortgage REIT industry is facing unprecedented interest rate pressure. Mortgage REITs aim to borrow money at the lowest short-term rate possible and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). With the Fed's historic pace of rate hikes, short-term borrowing costs have soared. And when coupled with an inverted yield curve, Annaly is facing a challenging operating environment.
But while things are challenging now, history shows that Annaly Capital Management is well positioned for future success.
For instance, the Treasury yield curve spends a disproportionate amount of time sloped up and to the right. This is to say that longer-maturing bonds have higher yields than bills set to mature in a matter of months or perhaps a year. Eventually, when the outlook for the U.S. economy brightens, the yield-curve inversion will end. When that happens, Annaly's net interest margin and book value will be primed for expansion.
Although mortgage REITs typically fare poorly in rising-rate environments, there is a long-term benefit in the cards for Annaly. Higher interest rates are lifting the yields it's receiving on the MBSs it's purchasing. Over time, this will also provide a lift to the company's net interest margin.
Further, the vast majority (90.4%) of Annaly Capital Management's investment portfolio is in agency securities. An "agency" asset is protected by the federal government in the event of default. Though this added protection does lower the yield Annaly generates from the MBSs it buys, it also allows the company to use leverage to its advantage. Being able to lever its portfolio makes Annaly's double-digit yield a keeper.
