With the curtain officially closed on 2023, it's safe to say that it was a phenomenal year for equities. The 127-year-old Dow Jones Industrial Average climbed to a fresh record high, while the benchmark S&P 500 and growth-fueled Nasdaq Composite registered respective gains of 24% and 43%. It was a needed reminder of how powerful optimism and patience can be on Wall Street.
Patience is also one heck of an ally when it comes to dividend stocks. According to a study from Ned Davis Research and Hartford Funds, publicly traded companies that initiated and grew their payouts between 1973 and 2022 generated an annualized return of 10.24%. Not only was this better than the annualized return of the equal-weighted S&P 500 Index (7.68%) over the same timeline, but it also crushed the annualized return of non-payers (3.95%) over this roughly half-century span.
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These results shouldn't come as a surprise. Companies that pay a regular dividend to their shareholders are usually profitable on a recurring basis, and they can often provide transparent long-term growth outlooks. Most importantly, dividend payers tend to be time-tested.
In an ideal world, income investors would enjoy high-octane yields with minimal risk. But in the real world, high-yields and risk tend to correlate. This means extra vetting is required by investors to seek out winners with ultra-high yields.
The good news is that safe, supercharged dividend stocks do exist, and some are ripe for the picking by opportunistic income seekers. What follows are three ultra-high-yield dividend stocks, with an average yield of 8.83%, which are screaming buys in 2024.
AT&T: 6.61% yield
The first top-notch dividend stock that stands out as a no-brainer buy in 2024 is none other than telecom company AT&T (T +0.47%).
Two factors contributed to AT&T's underperformance of the broader market last year. The first was rapidly rising interest rates. Legacy telecom companies are lugging around quite a bit of debt on their balance sheets. Future deals or refinancing could be considerably costlier as interest rates normalize at a higher level.
NYSE: T
Key Data Points
The other headwind that held back AT&T stock was the July report by The Wall Street Journal that suggested the legacy use of lead-sheathed cables by telecom companies could result in hefty replacement costs and environmental/health liabilities.
While there's no denying these are tangible concerns for AT&T, both appear to be largely overblown. Working backwards, the lead-clad cable concerns brought up by WSJ are a near-term nothingburger. AT&T hasn't found any evidence that its remaining lead-sheathed cables are a hazard to its workers or the environment. Further, any financial liability claims (should there be any) would likely take years to determine in the U.S. court system.
As for AT&T's balance sheet, it's demonstrably improved over the past two years. At the end of March 2022, just prior to its spinoff of content arm WarnerMedia, which was subsequently merged with Discovery to create Warner Bros. Discovery, AT&T was sitting on $169 billon in net debt. But thanks to this spinoff, Warner Bros. Discovery assumed certain lots of debt previously held by AT&T. When combined with cash compensation, as well as AT&T's own organic debt-reduction efforts, it's lowered its net debt to $128.7 billion, as of Sept. 30, 2023.
Most importantly, AT&T is operationally benefiting from the 5G revolution. Upgrading its network to support faster download speeds will lead to increased, high-margin data consumption by its wireless customers. Meanwhile, investments in mid-band spectrum have fueled five straight years of at least 1 million net broadband additions.
A forward price-to-earnings (P/E) ratio of less than 7 gives AT&T and its 6.6% yield a safe floor.
NYSE: PFLT
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PennantPark Floating Rate Capital: 10.17% yield
A second ultra-high-yield dividend stock that stands head-and-shoulders above its peers as a screaming buy in 2024 is business development company (BDC) PennantPark Floating Rate Capital (PFLT +2.95%). PennantPark pays its dividend on a monthly basis, with the company increasing its payout twice last year.
A BDC is a type of business that invests in the debt and/or equity of middle-market companies -- i.e., micro-cap and small-cap businesses. Although PennantPark held nearly $161 million in various common and preferred stock investments as of the end of September, its $906 million debt-securities portfolio makes it a predominantly debt-focused BDC.
If you're wondering why the company chose to veer toward debt investments, the answer is yield. Most middle-market companies are unproven, and therefore have limited access to traditional debt and credit markets. When these smaller businesses do obtain financing, it's often at a lending rate that's above the market average. It's why PennantPark's weighted average yield on debt investments stood at a hearty 12.6%, as of Sept. 30.
What's really fueled PennantPark's stellar operating performance of late is the fact that its entire debt-securities portfolio is variable rate. Every time the Federal Reserve raises interest rates, the variable rate on outstanding debt increases, too. Over the trailing-two-year period, ended Sept. 30, PennantPark's weighted average yield on debt investments climbed from 7.4% to the aforementioned 12.6%.
As you can imagine, there are added risks putting money to work in smaller, unproven businesses. However, PennantPark Floating Rate Capital's management team has done an excellent job mitigating these risks. The company's average investment, including its equity holdings, is just $8.1 million spread across 131 companies. This means no single investment is imperative to its success.
Furthermore, 99.99% of the company's debt-securities portfolio is first-lien secured debt. First-lien secured debtholders are first in line for repayment in the event that a borrower seeks bankruptcy protection.
PennantPark may be small, but it's a true gem for income seekers.
Image source: Getty Images.
Altria Group: 9.72% yield
The third ultra-high-yield dividend stock that's a screaming buy in 2024 is tobacco behemoth Altria Group (MO 1.11%). Altria is the company behind Marlboro, the most-dominant premium cigarette brand in the United States.
Altria's clearest headwind is that the percentage of adults smoking cigarettes has been steadily declining since the mid-1960s. Consumers have become aware of the potentially negative health consequences of long-term tobacco use. The Centers for Disease Control and Prevention notes that adult cigarette smoking rates have fallen to just 11.5%, as of 2021.
Normally, a declining pool of consumers would be a red flag from an investment standpoint. However, tobacco kingpin Altria has proved to be an exception to the rule.
The one factor Altria always has in its corner is pricing power. Tobacco products contain nicotine, which is an addictive chemical. The lure of nicotine for consumers has allowed Altria to increase its prices above and beyond the rate of inflation. In fact, price hikes have (often) more than offset the adverse impacts of lower cigarette shipments. This pricing power isn't going away -- especially with Marlboro accounting for a greater than 42% share of the cigarette market.
NYSE: MO
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This is a company that's also looking toward a smokeless future. On June 1, it completed a $2.75 billion acquisition of electronic-vapor company NJOY Holdings. Although Altria's sizable investment in e-vapor company Juul didn't pan out, Altria's purchase of NJOY looks to have rectified previous errors.
More specifically, NJOY Holdings has received a half-dozen marketing granted orders (MGOs) from the U.S. Food and Drug Administration. MGOs are approvals for e-vapor products and devices that gives them a green light to be on retail shelves. Most e-vapor products lack MGOs, and could be pulled from retail shelves at any point in the future.
Altria also has a sizable equity stake in Canadian licensed cannabis producer Cronos Group. If and when the U.S. federal government changes its tune on cannabis and reschedules or removes it entirely from the controlled substances list, Altria will be there to assist Cronos with product development and marketing.
Lastly, Altria Group is inexpensive. While it's no longer the growth story it once was, shares can be purchased for around 8 times forward earnings. That's a stellar deal for a company yielding nearly 10% that's raised its payout 58 times over the past 54 years.
