Wall Street accommodates a variety of investing strategies. However, few have delivered such promising results as buying high-quality dividend stocks and hanging onto those stakes over long periods.
A report I often reference from 10 years ago demonstrates just how powerful income stocks can be for patient investors. The wealth management division of JPMorgan Chase found that public companies initiating and growing their payouts between 1972 and 2012 generated an annualized return of 9.5%. By comparison, public companies with no dividend produced an annualized return of just 1.6% over the same four-decade span.
Image source: Getty Images.
But picking out great dividend stocks involves more than just throwing a dart at a financial newspaper or crossing your fingers. While income seekers would prefer the highest possible yield with little or no investment risk, studies show that investment risk and yield tend to increase in tandem once yields hit 4%. For income investors, it means extra vetting is required for high-yield and ultra-high-yield stocks.
The good news is that safe, supercharged dividend stocks do exist. What follows are three safe ultra-high-yield dividend stocks -- sporting an average yield of 10.45% -- which are surefire buys in the month of October.
Verizon Communications: 8.21% yield
The first safe, high-octane dividend stock that's begging to be bought in October is telecom behemoth Verizon Communications (VZ 0.12%). The company's more than 8% yield is the highest in its multidecade history as a publicly traded company.
The reason Verizon's yield has soared is because its share price has been nearly halved since the end of November 2020. The poor performance of Verizon stock can be blamed on rapidly rising interest rates, which could make future acquisitions and debt-refinancing costlier, as well as a recent report from The Wall Street Journal that suggests legacy telecom companies could face financial liabilities tied to their use of lead-clad cables.
NYSE: VZ
Key Data Points
Though these are both concerns that should be acknowledged by investors, neither is particularly worrisome given Verizon's operating performance amid two key catalysts, as well as its valuation floor.
Verizon's two catalysts are both tied to the 5G revolution. It took roughly a decade for wireless providers to upgrade their networks from 4G LTE to 5G speeds, which has led to a steady stream of device replacements. Though Verizon is seeing an increase in retail sales at its stores, the important win is that 5G download speeds will increase data consumption. Data is the component within the company's wireless segment that generates the juiciest margins.
The other catalyst being fueled by the 5G revolution is a meaningful uptick in net broadband additions. Even though the growth heyday for broadband was more than 20 years ago, adding new broadband subscribers boosts Verizon's operating cash flow and incents high-margin service bundling.
It's also worth pointing out that, according to Verizon, lead-sheathed cables make up a small percentage of its network. Even if Verizon were to face financial liabilities tied to the use of lead-clad cables, the U.S. court system would, likely, be making that determination many years down the road. In other words, the WSJ report isn't a big concern for Verizon or other legacy telecom companies.
Trading at less than 7 times current- and forward-year earnings, Verizon and its 8.2% yield look to have limited downside.
NYSE: MO
Key Data Points
Altria Group: 9.32% yield
A second safe ultra-high-yield dividend stock that's ripe for the picking in October is tobacco stock Altria Group (MO 0.70%). Altria has increased its payout 57 times over the past 53 years, making it part of the exclusive group of companies known as Dividend Kings.
The biggest knock against Altria is declining cigarette shipments in the United States. Since the mid-1960s, U.S. adult smoking rates have dropped from about 42% to 11.5%, as of 2021. With people becoming more aware of the long-term negative health effects associated with smoking/using tobacco products, Altria's long-term growth trajectory would appear challenged. But don't write off one of Wall Street's top-performing companies, based on total returns, over the past 50 years just yet.
Although shipment volumes are flat or declining, one thing Altria does have is virtually unsurpassed pricing power. Tobacco products contain nicotine, which is an addictive chemical. The desire for existing users to continue smoking tobacco products allows Altria to raise its prices and more than offset shipments declines, as well as inflation.
It also doesn't hurt that Altria is behind the most-popular premium cigarette brand, Marlboro. While Altria does have a handful of other premium and discount brands, Marlboro accounted for 42% of cigarette market share by itself in the first-half of 2023. Owning the most-popular premium brand makes it even easier for the company to pass along price increases.
However, Altria's management team is looking to the future, as well. While the company isn't abandoning the tobacco products that have made it successful, it's aiming to expand its sales channels to include smokeless sources. One example is the $2.75 billion acquisition of e-vapor company NJOY Holdings, which closed in June.
Unlike most e-vapor companies, NJOY has received a marketing granted order for six of its products and services. With Altria getting burned by its investment in e-vapor company Juul, its acquisition of NJOY ensures it won't run into the same regulatory issues a second time.
Furthermore, Altria Group is reasonably cheap. Even though Altria Group isn't the growth story it once was, a forward price-to-earnings ratio of 8, coupled with its robust capital-return program, makes this tobacco stock a smoking-hot buy.
Image source: Getty Images.
Annaly Capital Management: 13.82% yield
The third safe ultra-high-yield dividend stock that's a surefire buy in October is none other than mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 2.37%). Annaly has returned north of $24.5 billion in dividends to its shareholders since its initial public offering in 1997, and its double-digit yield (currently 13.8%) has pretty much been the norm over the past two decades.
The biggest challenge for Annaly and the mortgage-REIT industry is the pace at which the Federal Reserve raised interest rates. Putting aside that mortgage REITs perform better in low-lending-rate environments, the 525-basis-point uptick in the federal funds rate since March 2022 rapidly increased borrowing costs. That's a problem given that mortgage REITs borrow money at low short-term lending rates and use this capital to purchase higher-yielding long-term assets. Higher short-term borrowing costs and a deeply inverted yield curve have weighed heavily on Annaly's book value and net interest margin (i.e., its average yield on owned assets less its average borrowing rate).
There is, however, plenty of light at the end of the tunnel for Annaly -- and I'd opine that we're a lot closer to the end of the proverbial tunnel than its stock performance suggests.
NYSE: NLY
Key Data Points
For starters, a higher interest rate environment does come with a longer-term benefit for Annaly. The mortgage-backed-securities (MBS) it's purchasing will sport higher yields. Over time, this should increase the average yield on the assets it owns, thusly expanding its net interest margin.
Additionally, members of the nation's central bank have made clear that the Fed needs to exit its MBS holdings sooner than later. With the Fed, presumably, out of the picture, there will be less competition for MBS purchases. That's good news for mortgage REITs and should result in a healthy expansion of their book value in the years to come.
I'll also add that the Treasury yield curve, while inverted now, spends a disproportionate amount of time sloped up and to the right. This is to say that longer-maturing bonds sport higher yields than Treasury bills set to mature in a few months. Eventually, the yield-curve inversion will end and Annaly's net interest margin will have another catalyst for expansion.
Lastly, just over 90% of Annaly's $78.9 billion investment portfolio is comprised of agency assets. An "agency" security is backed the federal government in the unlikely event of default. This added protection allows Annaly to lever its portfolio in order to support its outsized distribution.
