There's no shortage of investing strategies to build wealth on Wall Street. However, few have been as successful as buying and holding high-quality dividend stocks.
The beauty of income stocks is that they're time-tested and almost universally profitable on a recurring basis. These are businesses that have proven to investors that they have the tools and intangibles to successfully navigate choppy waters.
Furthermore, dividend stocks have a rich history of outperforming companies that don't offer a payout. Whereas non-payers trudged their way to a 1.6% annualized return between 1972 and 2012, according to a 2013 report from the wealth management division of JPMorgan Chase, public companies that initiated and grew their payouts produced an annualized return of 9.5% over the same four-decade stretch.
However, no two dividend stocks are created equal. In fact, studies have shown that once yields top 4%, risk and yield tend to rise in tandem.
Image source: Getty Images.
Although some high-yield and ultra-high-yield stocks (those with yields 4x or more the yield of the S&P 500) can be more trouble than they're worth, this isn't always the case. Some ultra-high-yield stocks are exceptionally safe and can be counted on for substantial income generation.
If you want to bring home an average of $100 per month ($1,200/year) in super safe dividend income, simply invest $13,800 (split equally, three ways) into the following ultra-high-yield stocks, which sport an average yield of 8.71%!
Enterprise Products Partners: 7.62% yield
The first ultra-high-yield stock that can help produce an average of $100 in super safe monthly income ($1,200 spread out over 12 months) is energy company Enterprise Products Partners (EPD +0.89%). Enterprise has raised its base annual distribution for 25 consecutive years and returned an aggregate of nearly $51 billion, including buybacks, to its investors since going public.
With the exception of major oil and gas companies, the words "safe" and "oil" may seem like an oxymoron when placed in the same sentence. Less than four years ago, oil and gas stocks were clobbered by the short-lived COVID-19 recession and the historic demand drawdown that ensued. While the rapid plunge in the spot price of crude oil wreaked havoc on drillers, at least for a short period, Enterprise Products Partners was largely spared.
NYSE: EPD
Key Data Points
The difference is that Enterprise is a midstream operator and not a driller. It's the equivalent of an energy middleman that transports and stores recovered and refined product.
What's allowed Enterprise Products Partners to thrive in virtually any economic climate is the structure of its contracts with upstream drilling companies. In the neighborhood of three-quarters of its contracts are fixed-fee. No matter what happens with the spot price of crude oil or with inflation, Enterprise's long-term contracts with drillers lead to highly predictable operating cash flow year in and year out.
Being able to accurately forecast the company's cash flow is critical to Enterprise's success. It's what's given management the confidence to outlay $6.8 billion for approximately one dozen major projects. It's also the key cog that fuels acquisitions and the company's steady growth in its base annual distribution.
Another positive for Enterprise Products Partners is tight global oil supply. Years of reduced capital spending during the COVID-19 pandemic, coupled with Russia's ongoing war with Ukraine, will make it difficult to increase worldwide oil supply anytime soon. This likely means higher spot prices for crude oil and more incentive for domestic drillers to eventually up production. In other words, this is the perfect scenario for Enterprise to land more long-term, lucrative deals.
NYSE: PFLT
Key Data Points
PennantPark Floating Rate Capital: 11.26% yield
Whereas the other two ultra-high-yield stocks on this list pay their dividends on a quarterly basis, business development company (BDC) PennantPark Floating Rate Capital (PFLT +1.03%) parses out its payouts on a monthly basis. After raising its monthly dividend twice this year, it's the perfect candidate to help you generate an average of $100 per month in super safe income from a starting investment of $13,800 (split three ways).
A BDC is a company that invests in the equity (common and preferred stock) and/or debt of middle-market businesses. These are typically micro- and small-cap companies, some of which may be publicly traded. As of the end of September, PennantPark's $1.07 billion investment portfolio primarily consisted of $906.3 million in debt securities. This makes it a debt-focused BDC.
The "why" behind PennantPark's focus on debt is very simple: yield, yield, yield!
Most middle-market companies are unproven in some way, form, or shape, and therefore have limited access to traditional debt and credit markets. With few borrowing options available to middle-market businesses, the yields on the debt securities PennantPark does own will be above average.
The best aspect of PennantPark's operating model is that 100% of its debt securities are variable rate. With the Federal Reserve increasing interest rates at the fastest pace in more than four decades, PennantPark's weighted average yield on debt investments has soared from 7.4%, as of Sept. 30, 2021 to 12.6% exactly two years later. As long as the Fed remains steadfast in its desire to reduce the prevailing inflation rate, PennantPark's bottom line will benefit.
Another reason income investors can trust this small-cap stock to deliver big-time dividends is the diversification of its portfolio. Including its equity positions, PennantPark has $1.07 billion spread across 131 companies, which equates to an average investment of $8.1 million. No single investment is imperative to the success of this company, which suggests smooth sailing ahead.
Image source: Getty Images.
Verizon Communications: 7.24% yield
A third ultra-high-yield stock that can generate an average of $100 in monthly income, or $1,200 over the course of a year, from an initial investment of $13,800 (split equally, three ways) is telecom stock Verizon Communications (VZ 0.80%). The company's 7.2% yield is very close to its all-time high.
Verizon is currently contending with two headwinds. The first is The Wall Street Journal report from July that suggests lead-sheathed cables still in use by major telecom companies could be costly to replace and lead to health-related financial liabilities.
The other issue for Verizon is rapidly rising interest rates. While PennantPark is loving the hawkish Fed, future deals and refinancing activity for Verizon, which is carrying a lot of debt on its balance sheet, will almost certainly be costlier.
Though these two challenges might prevent significant earnings multiple expansion for Verizon, a worst-case scenario appears baked into its share price already.
NYSE: VZ
Key Data Points
As an example, the WSJ report is pretty much a nonstarter in the near term. In addition to Verizon noting that lead-clad cables make up only a small portion of its network, any financial liability would almost certainly be determined in the U.S. court system. That would take years -- if there's even a case.
What's far more important is that the 5G revolution is moving the needle for Verizon. Retail postpaid churn remains near historic lows, while wireless service revenue is pushing modestly higher. Faster download speeds should encourage more data consumption, and data tends to be the juiciest margin driver for Verizon's wireless segment.
Equally exciting is the fact that Verizon added more than 400,000 net broadband customers for the fourth consecutive quarter, as of Sept. 30. Its big investment in mid-band spectrum is really paying off. Even though broadband isn't the growth story it was 20 years ago, it's a path that encourages high-margin service bundling.
A forward price-to-earnings ratio of 8 represents a safe floor for a brand-name company with a sustained 7%-plus yield.
