One of the greatest aspects of putting your money to work on Wall Street is that there isn't a one-size-fits-all strategy to grow your wealth. But among the seemingly countless ways to grow your nest egg, it's tough to top the long-term success rate offered by purchasing high-quality dividend stocks.
Companies that pay a regular dividend to their shareholders tend to be profitable on a recurring basis and time-tested. These are businesses that have demonstrated their ability to navigate a challenging economic climate and come out stronger on the other side.
What's more, dividend stocks have statistically left non-paying companies eating their dust over long periods. A 2013 report from the wealth-management division of JPMorgan Chase found that companies initiating and growing their dividends generated an annualized return of 9.5% between 1972 and 2012. By comparison, publicly traded companies with no payout crawled to a meager 1.6% annualized return over this same four-decade span.
Image source: Getty Images.
In a perfect world, income seekers would generate supercharged yields with minimal risk to their principal. Unfortunately, studies have shown that risk and yield tend to correlate once high-yield status (4%) is reached. Put another way, higher-yielding stocks can sometimes be traps for income seekers.
But this isn't always the case. With careful vetting, high-quality, ultra-high-yield stocks -- those with yields that are four or more times higher than the S&P 500 -- can deliver big-time returns for patient investors.
What follows are three unrivaled ultra-high-yield stocks, sporting an average yield of 8.72%, which are begging to be bought in December.
AT&T: 6.62% yield
The first superior ultra-high-yield dividend stock that's itching to be bought as we motor toward the end of 2023 is legacy telecom stock AT&T (T +0.68%).
Two headwinds were responsible for sending AT&T's stock to a 30-year low in July. The first is a rapid rise in interest rates, which will make future borrowing and refinancing costlier. AT&T closed out the September quarter with $138 billion in total debt.
The other worry for AT&T is a report published in July from The Wall Street Journal that alleges lead-clad cables still in use by legacy telecoms may present a health hazard. The intimation is that the replacement of these cables, along with potential health-related liabilities, could be quite costly for telecom companies.
NYSE: T
Key Data Points
Though these are real issues that prospective investors shouldn't sweep under the proverbial rug, they're not game changers for AT&T. For example, the WSJ report overlooks the fact that lead-sheathed cables make up a small percentage of AT&T's network. It also fails to consider that any liability costs (if there are any) would be determined in the U.S. court system, and that would likely be a long process.
More importantly, AT&T's balance sheet has improved by leaps and bounds since spinning off its content arm, WarnerMedia, in April 2022. When WarnerMedia merged with Discovery to create Warner Bros. Discovery, this new media entity assumed certain lots of debt that AT&T had previously held. When combined with cash payments, this spinoff led to $40.4 billion in considerations for AT&T. Between March 31, 2022 and Sept. 30, 2023, AT&T's net debt fell from $169 billion to $128.7 billion. Even with higher interest rates, AT&T's balance sheet is in far better shape, and the company's 6.6% dividend yield looks safe for years to come.
Best of all, the 5G revolution has led to a meaningful improvement in AT&T's core growth drivers. Wireless-data consumption is up, while overall churn rates remain near historic lows. Meanwhile, AT&T looks to be well on its way to a sixth consecutive year of at least 1 million net-broadband additions. Though broadband isn't the growth driver it was in the early 2000s, it's still a sales channel known to generate predictable cash flow and encourage high-margin service bundling.
Valued at less than 7 times forward-year earnings, AT&T offers a favorable risk-versus-reward profile for income- and value-seeking investors.
NYSE: PFLT
Key Data Points
PennantPark Floating Rate Capital: 10.95% yield
A second incomparable ultra-high-yield dividend stock that's begging to be added to income seekers' portfolios in December is little-known business development company (BDC) PennantPark Floating Rate Capital (PFLT 1.23%). PennantPark doles out its dividend on a monthly basis and has increased its payout twice since the year began.
Without getting overly complicated, BDCs invest in the debt or equity (common and/or preferred stock) of middle-market companies, which are typically micro- and small-cap businesses. Though PennantPark does have equity investments in its portfolio, the $906.3 million in debt securities it holds makes it a primarily debt-focused BDC.
The prime reason PennantPark has veered toward debt securities is because of their yield. Middle-market companies often have limited access to traditional debt and credit markets. This means they're paying above-market rates for the financing they can secure. As a result, PennantPark is netting a healthy return on the debt securities it's holding.
But there's far more to this story. In case the full name of the company didn't give it away, the entirety of PennantPark Floating Rate Capital's debt-securities portfolio bears variable interest rates. Every rate hike by the nation's central bank since March 2022 has translated into higher yields for PennantPark. Over the trailing two years, ended Sept. 30, 2023, the company's weighted-average yield on debt investments has jumped 520 basis points to 12.6%. As long as the Fed remains hawkish, PennantPark will be rolling in the dough.
Arguably, the biggest concern for PennantPark is the likelihood that one or more of these potentially unproven businesses defaults on their payments. But this "headwind" is a fairly moot point given the steps management has taken to protect their company's invested assets.
To begin with, all but $0.1 million of the company's $906.3 million in debt investments has been put to work in first-lien secured debt. First-lien secured debtholders are first in line for repayment in the event that a borrower seeks bankruptcy protection.
Furthermore, PennantPark has invested in 131 companies, including its equity stakes, which works out to an average investment of $8.1 million. No single investment is critical to the company's success, nor can any one investment turn this company on its head.
Image source: Getty Images.
Innovative Industrial Properties: 8.58% yield
The third unrivaled ultra-high-yield dividend stock begging to be bought in December is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR 1.04%), which is commonly known as "IIP." Since introducing a quarterly payout in the summer of 2017, IIP's distribution has grown by a jaw-dropping 1,100%!
The way REITs make money is by acquiring properties/assets (often within a specific industry or focus) and leasing them for extended periods. Occasionally, these properties are also sold for a profit or to raise additional capital for a future acquisition. IIP is no different save for the fact that it's buying medical marijuana cultivation and processing facilities, and seeking to lease them for 10 or more years to multistate operators (MSOs).
The buzzkill for Innovative Industrial Properties came in the form of an unexpected drop in its on-time rental-collection rate during the first quarter. Whereas a 100% collection rate had been the norm for years, a challenging environment for MSOs pushed its on-time collection rate in January and February down to 92%.
NYSE: IIPR
Key Data Points
Eventually, all REITs face collection challenges. IIP's management team has responded admirably to these speed bumps. A combination of asset sales and reworked master-lease agreements has increased the on-time rental collection rate to 97% in the September-ended quarter. Though 100% would (obviously) be better, there's minimal concern about IIP's operating cash flow or the safety of its quarterly distribution at the moment.
Something else working in Innovative Industrial Properties' favor is the structure of its leases. The company's 103 properties-operating portfolio is 98.5% triple-net leased (also known as "NNN-leased"). A triple-net lease requires the tenant to cover virtually all property costs, including utilities, property taxes, insurance, and maintenance. While NNN leases result in a lower monthly-rental collection for IIP, they also remove the chance of unexpected costs rocking the boat. The key point here is that IIP's adjusted funds from operations (FFOs) are highly predictable.
Lastly, Innovative Industrial Properties has actually benefited from the lack of cannabis reform on Capitol Hill. As long as marijuana remains illicit at the federal level, MSOs will have limited access to traditional lending services. IIP has stepped up with its sale-leaseback agreements. IIP is purchasing properties from cash-seeking MSOs, then leasing these properties back to the seller for the long run. It's a win for both parties, and it's helped expand IIPs vast portfolio.
