Wall Street has helped investors grow their wealth for more than a century. While there's no perfect investment strategy, one that stands out as having a phenomenal track record of success is buying dividend stocks.
Last year, Hartford Funds released a lengthy report ("The Power of Dividends: Past, Present, and Future") that examined, among other things, the performance of income stocks to non-payers over the past half-century. Including data from Ned Davis Research, the researchers at Hartford Funds note that dividend payers have delivered an annualized return of 9.18% between 1973 and 2022. Meanwhile, non-payers have clawed their way to a less-impressive 3.95% annualized return spanning five decades.
What Hartford Funds' dividend report shows is that it's not a question of if dividend stocks are a smart buy for patient investors; it's a matter of which dividend stocks offer the best prospects.
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In an ideal world, income seekers are receiving market-topping yields with minimal risk to their principal. But in reality, studies have shown that risk tends to rise in lockstep with yields. While this doesn't mean high-yield stock are off-limits for income seekers, it does imply that extra vetting is required to find winners.
The good news is that properly vetted companies with high-octane dividends can truly pack a punch for income investors. If you want $600 in super safe dividend income in 2024, simply invest $8,000 (split equally, three ways) into the following three ultra-high-yield stocks, which sport an average yield of 7.51%!
Enterprise Products Partners: 7.68% yield
The first exceptionally safe ultra-high-yield stock that can help you bring home $600 in dividend income in the new year is energy company Enterprise Products Partners (EPD 0.54%). Enterprise has increased its base annual distribution in each of the past 25 years.
For some investors, the idea of putting their money to work in an oil and gas stock isn't going to be appealing. Less than four years ago, the COVID-19 pandemic led to a demand cliff for energy commodities that absolutely ravaged drilling companies. Income investors may still be a bit gun-shy of energy stocks because of what happened in 2020.
NYSE: EPD
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However, Enterprise Products Partners was spared from these wild vacillations -- at least from an operating standpoint. That's because Enterprise isn't a driller. It's a midstream energy company, which effectively means it's a middleman tasked with transporting and storing liquid, gas, and refined products.
What often makes midstream oil and gas companies desirable for income investors is the structure of the contracts they forge with drilling companies. In addition to spanning multiple years, these are predominantly fixed-fee contracts. This is to say that Enterprise can accurately forecast its annual operating cash flow year in and year out, regardless of what happens to the spot price of crude oil.
For midstream energy companies, there's nothing more important than being able to accurately gauge annual cash flow. Having a good bead on annual expenditures and cash flow is what gives Enterprise Products Partners' management team the confidence to make bolt-on acquisitions, as well as advance a dozen major projects. Many of these organic projects are focused on expanding the company's natural gas liquids infrastructure.
Macro factors are working in Enterprise's favor as well. Demand uncertainty during the pandemic caused global energy companies to reduce their capital expenditures. Even though life is effectively back to normal, oil supply remains constrained, which is providing a boost to the spot price of crude oil. A higher oil price should encourage additional drilling, which in turn gives Enterprise the opportunity to land more lucrative, long-term, fixed-fee contracts.
NYSE: LTC
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LTC Properties: 7.11% yield
A second ultra-high-yield stock that can help generate $600 in super safe dividend income in 2024 from an initial investment of $8,000 (split three ways) is senior housing-focused real estate investment trust (REIT) LTC Properties (LTC +0.58%). LTC pays its dividend on a monthly basis and is currently doling out a 7.1% yield, which is about five times the yield of the benchmark S&P 500.
Similar to Enterprise Products Partners, the pandemic represented a historic challenge for LTC Properties. With the company catering to senior housing and healthcare facilities, and COVID-19 hitting the elderly particularly hard, there were genuine concerns about occupancy rates and the ability of LTC's tenants and borrowers to make their payments.
Though historic challenges aren't ideal, one of the reasons LTC Properties makes for such a strong buy has been its ability to navigate the past four years. It's successfully reworked master lease agreements, divested properties, and transitioned leases to new tenants to minimize or eliminate rental delinquencies and ensure predictable funds from operations (FFO) from one year to the next.
Aside from the strategic moves made by LTC's management team, the Federal Reserve's monetary policy is now also working in its favor. In addition to leasing senior-focused healthcare facilities, LTC Properties provides mortgage loans and mezzanine loans. The most aggressive rate-hiking cycle in four decades is fueling an increase in interest income.
Portfolio diversification is yet another reason LTC Properties has been consistently delivering for income seekers. The company closed out September with 208 properties in its portfolio spanning 27 states. More importantly, LTC had 29 operating partners. Reducing its reliance on a handful of long-term care operators means less chance of future FFO disruption.
Lastly, LTC Properties should benefit from an aging America. The ongoing retirement of baby boomers presents a scenario that should allow LTC to possess exceptionally strong rental pricing power in the decades to come.
Image source: Getty Images.
Innovative Industrial Properties: 7.73% yield
The third ultra-high-yield stock that can produce $600 in dividend income in 2024 from a starting investment of $8,000 (split equally among three stocks) is cannabis REIT Innovative Industrial Properties (IIPR +1.33%), better known as IIP. Since introducing a dividend in 2017, IIP's quarterly payout has grown by 1,113%!
For the past three years, marijuana stocks have been an absolute buzzkill for the investing community. Joe Biden winning the presidency in November 2020, coupled with a Democrat-controlled Congress during Biden's first two years in office, was expected to lead to cannabis reform at the federal level. Unfortunately, little progress has been made, which has resulted in the widespread underperformance of pot stocks.
Thankfully, IIP is built differently. It's tasked with acquiring medical marijuana cultivation and processing facilities, which are then leased for extended periods (think 10 to 20 years).
NYSE: IIPR
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Innovative Industrial Properties' stock was clobbered in early 2023 when its collection rate declined to 92%, from what had consistently been 100%. But thanks to the guidance of the company's management team, reworked lease agreements and divestments bolstered the collection rate, including management fees, to 97% in the September-ended quarter. All REITs eventually contend with delinquencies, and IIP's management team has shown that it's up to the task of resolving them.
Another reason Innovative Industrial Properties should continue to thrive is the structure of its leases. The company's more than 100-property operating portfolio is 98.5% triple net leased. A triple net lease requires tenants to cover all property costs, including utilities, maintenance, property taxes, and insurance. Though rental income is lower with triple net lease agreements, it also removes any potential surprise expenses from the equation for IIP.
The final thing worth nothing about Innovative Industrial Properties is that it actually benefits from cannabis remaining illegal at the federal level. As long as marijuana remains an illicit substance, cannabis companies will have limited access to traditional banking services.
IIP has stepped up to the plate via its sale-leaseback program. It's purchasing properties from cash-needy multi-state operators (MSOs) and immediately leasing them back to the seller. This action provides MSOs with cash and lands IIP long-term tenants. Therefore, a cannabis stalemate on Capitol Hill is excellent news for IIP.
