For more than a century, Wall Street has been a wealth-building machine. Although there are countless strategies that can, over time, make investors richer, few strategies have been more successful from a return standpoint than buying and holding dividend stocks.
The unmistakable lure of income stocks is that they outperform. According to a report issued last year by the Hartford Funds, in collaboration with Ned Davis Research, dividend-paying companies have generated an annualized return of 9.18% over the past half-century (1973-2022). By comparison, publicly traded companies that don't offer a payout have clawed their way to a more pedestrian annualized return of 3.95% over the same five-decade stretch.
These results shouldn't be a surprise. Companies that regularly dole out a dividend to their shareholders are often profitable on a recurring basis, time-tested, and capable of offering transparent, long-term growth guidance. They're just the type of business we'd expect to increase in value over long periods.
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However, no two dividend stocks are cut from the same cloth. Although high-yield stocks can be appealing, they can sometimes come with added risk. But this doesn't mean all supercharged income stocks are off the table.
If you want $1,000 in super-safe dividend income in 2024, all you'd need to do is invest $9,750 (split equally, three ways) into the following three ultra-high-yield stocks, which sport a scorching-hot average yield of 10.28%!
AT&T: 6.43% yield
The first exceptionally reliable ultra-high-yield dividend stock that can help you generate $1,000 in income in 2024 from an initial investment of $9,750 (split across three stocks) is telecom behemoth AT&T (T 1.02%).
Whereas Wall Street is firmly in a new bull market, AT&T has badly lagged. This is a function of investors being concerned following a July report from The Wall Street Journal that alleged legacy telecom companies utilizing lead-sheathed cables could face large environmental/health liabilities, as well as replacement costs.
For what it's worth, AT&T responded to the WSJ's allegations by noting that it's not seen any evidence that lead-clad cables pose an environmental hazard or threat to people. Furthermore, any potential liabilities would likely be determined by the U.S. court system, which is often slow to issue rulings. In short, this a relative nonstarter for AT&T and its peers.
What current and prospective investors should be focused on is AT&T's steadily improving operating performance. Upgrading its network to support 5G download speeds is encouraging high-margin data consumption. Since wireless services are effectively viewed as a basic necessity, churn rates remain near a historic low.
Furthermore, AT&T closed out 2023 by adding at least 1 million net-broadband customers for a sixth straight year. Being able to offer 5G speeds to residential customers and businesses has proved to be a powerful tool to encourage service bundling and boost the company's operating cash flow.
Another reason AT&T is such a rock-solid dividend stock is because its balance sheet has meaningfully improved since divesting content arm WarnerMedia. When the WarnerMedia spin-off merged with Discovery to create Warner Bros. Discovery, AT&T earned more than $40 billion in concessions -- most of which involved the new media entity taking on select debt lots previously held by AT&T. Since March 31, 2022, AT&T's net debt has declined from $169 billion to $128.9 billion. Having better financial flexibility all but ensures that AT&T's 6.4% yield is safe.
Alliance Resource Partners: 13.61% yield
A second high-octane income stock that can deliver $1,000 in super-safe dividend income in 2024 from a starter investment of $9,750 (split in thirds) is coal company Alliance Resource Partners (ARLP -1.63%).
When this decade began, it was widely expected that clean energy solutions, including wind and solar, would proliferate and steadily make dirty fuel sources, like coal, a dying commodity. However, the COVID-19 pandemic changed everything. With global energy companies forced to slash their capital expenditures due to unprecedented demand uncertainty, it's coal that's stepped in to fill the production void and meet growing global demand needs.
What's more, rapidly rising interest rates have made it less attractive for energy majors to borrow money to expand production. Established coal producers haven't been hindered by higher rates to the same degree as oil and gas producers.
Although Alliance Resource Partners is undeniably benefiting from a historically high per-ton sales price for its coal, it's the forward-looking approach of its management team that's been the real boon. The company regularly locks in production at favorable prices up to four years in advance. As of late January 2024, it already had 93% of its estimated production (at the midpoint of guidance) of 34.9 million tons priced and committed for the current year, with another 15.6 million tons on the books for 2025. Committing orders years in advance helps ensure highly predictable operating cash flow.
This is also a good time to mention that Alliance Resource Partners has conservatively expanded its production and avoided the pitfalls of digging itself too deeply into debt like many of its peers. Though it closed out 2023 with $277.3 million in net debt, its net-leverage ratio is a modest 0.31. Furthermore, the company is slated to complete a number of projects in 2024, which should lead to considerably lower capital expenditures next year.
Additionally, Alliance Resource Partners has expanded its revenue channels to include oil and natural gas royalty interests. As long as the supply of traditional energy commodities is constrained, there's a good likelihood that the price of these underlying commodities will be buoyed or head higher. This should help the company's oil and gas royalty segment bring in higher earnings before interest, taxes, depreciation, and amortization (EBITDA).
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PennantPark Floating Rate Capital: 10.79% yield
The third ultra-high-yield stock that can help you bring home $1,000 in dividend income in 2024 from a beginning investment of $9,750 (split equally in thirds) is business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.61%). PennantPark pays its outsized dividend on a monthly basis.
Without getting overly complicated, BDCs seek to invest in the debt and/or equity (common and preferred stock) of middle-market businesses. I'm talking about smaller, generally unproven private companies. Despite holding close to $161 million in various common and preferred stock at the end of September, PennantPark's $906.3 million in debt securities held makes it a predominantly debt-focused BDC.
The reason management has chosen to emphasize debt deals is simple: yield. Smaller, unproven companies usually have limited options when it comes to accessing traditional debt and credit markets. When these smaller businesses land financing deals, they typically have attached interest rates that are higher than the market average. As long as these middle-market companies make their interest payments on time, it results in an outsized return of investment for companies like PennantPark Floating Rate Capital.
The best aspect of PennantPark's operating model is that its debt-investment portfolio is 100% variable rate. In other words, every time the Federal Reserve adjusts its federal funds target rate, it impacts the weighted-average yield PennantPark receives on the outstanding loans it holds. The most aggressive rate-hiking cycle in four decades by the Fed has catapulted PennantPark's weighted-average yield on debt investment from 7.4% to 12.6% in a two-year period, ended Sept. 30, 2023.
Despite focusing its efforts on smaller/unproven private companies, PennantPark has dealt with very low payment delinquencies. Less than 1% of its debt-securities portfolio was on non-accrual as of the end of September. This is a testament to proper vetting prior to financing being given a green light.
Furthermore, 99.99% of the company's debt-securities portfolio is first-lien secured loans. First-lien debtholders are at the front of the line in the event that a borrower seeks bankruptcy protection. Management has done an excellent job of positioning the company to preserve capital while maximizing yield.
