Over long periods, Wall Street is nothing short of a wealth-building machine for patient investors. While there are countless strategies investors can employ to grow their nest egg in the stock market, buying and holding high-quality dividend stocks tends to be among the smartest ways to make money.
Last year, the Hartford Funds, in collaboration with Ned Davis Research, released a report that examined the power of dividend stocks over time. In particular, researchers examined the annualized performance of dividend stocks to nonpayers over the previous half-century (1973-2022). Whereas publicly traded companies that don't offer a payout delivered a modest annualized return of 3.95%, the dividend payers more than doubled up the nonpayers with a 9.18% annualized return.
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Hartford Funds' findings on dividend stocks aren't a surprise. Companies that can generate a recurring profit, consistently share a percentage of that profit with their shareholders, and offer transparent long-term growth guidance, should be expected to rise in value over time.
The challenge for income seekers is maximizing the yield they receive while avoiding danger. Since risk and yield do tend to correlate, high-yielding stocks can sometimes be more trouble than they're worth. But this isn't always the case.
What follows are three magnificent ultra-high-yield dividend stocks -- sporting an average yield of 7.34% -- that are screaming buys in February.
Altria Group: 9.48% yield
The first unrivaled dividend stock that makes for a genius buy in the shortest month of the year is domestic tobacco giant Altria Group (MO -0.37%). Altria has raised its payout 58 times over the past 54 years.
There's no question that Altria's growth heyday is in the rearview mirror. Consumers have become increasingly aware of the potential dangers of long-term tobacco use, which has led to a precipitous downturn in adult cigarette smoking rates dating back to the mid-1960s. Whereas roughly 42% of U.S. adults smoked cigarettes in the mid-1960s, the Centers for Disease Control and Prevention finds that only 11.5% of adults were smokers as of 2021.
Though a shrinking pool of users would normally be the ultimate red flag for investors, Altria Group has two well-defined catalysts working in its favor.
As I noted somewhat recently, Altria possesses exceptional pricing power on its tobacco products. Tobacco contains nicotine, which is an addictive chemical. The addictive lure of nicotine makes smokers more willing to absorb price increases that outpace the prevailing rate of inflation. Even though aggregate cigarette shipments have been declining, Altria has the ability to modestly grow its sales by raising its prices.
I'll add to the above that it's a lot easier for Altria to raise its prices, compared to other cigarette producers, because of its dominant Marlboro brand. Marlboro closed out 2023 with a 42.1% share of the cigarette category. Smokers are willing to pay up for a premium brand they're familiar with.
The second catalyst for Altria is its push into smokeless products. A perfect example is its June 2023 acquisition of electronic-vapor company NJOY Holdings. NJOY has received marketing granted orders (MGOs) for a half-dozen of its products from the U.S. Food and Drug Administration. MGOs are effectively green lights for NJOY's e-vapor products to stay on retail shelves. The overwhelming majority of vape products in retail stores lack MGOs.
Valued at 8 times forward-year earnings and sporting a yield that's approaching 10%, Altria looks like a dividend investors' dream come true.
Pfizer: 6.24% yield
Perhaps no ultra-high-yield dividend stock embodies the idiom "one man's trash is another man's treasure" more so than pharmaceutical stock Pfizer (PFE 0.55%). With shares of the company once again nearing a 10-year low, its yield has ballooned to more than 6.2%.
The issue for Pfizer is that its COVID-19 tailwind has come and gone. Pfizer was one of the few companies to successfully develop a COVID-19 vaccine (Comirnaty), as well as an oral treatment (Paxlovid) to lessen symptoms of the illness. After generating more than $56 billion in combined sales from Comirnaty and Paxlovid in 2022, Pfizer is forecasting only a combined $8 billion from these two blockbusters in the current year.
While this might feel like letting air out of the tire on a car, let me be perfectly clear that none of Pfizer's proverbial tires are flat.
On an apples-to-apples basis, which excludes the company's COVID-19 treatments, Pfizer's remaining portfolio of dozens of approved therapies grew by 7% in 2023, with double-digit growth from its Specialty Care segment. Pfizer's portfolio, sans COVID-19 treatments, is expected to grow by another 3% to 5% in 2024.
Furthermore, Pfizer's share price was punished after its admission in December that its acquisition of cancer drug developer Seagen would result in a one-time hit of $0.40 per share for its 2024 earnings. Looking more than 12 months out, Pfizer anticipates cost synergies from this deal, as well as a considerably more robust portfolio of high-margin cancer therapies.
Investors would also be wise to note that the healthcare sector is highly defensive. Regardless of how well or poorly the U.S. economy performs, people still need prescription medicines and healthcare services. In short, Pfizer's operating cash flow tends to be predictable in any economic climate.
Lastly, the valuation makes a lot of sense. Investors can scoop up shares of Pfizer right now for less than 10x forward-year earnings and a mere 2.5x estimated sales in the current year.
Image source: Getty Images.
Verizon Communications: 6.31% yield
The third magnificent ultra-high-yield dividend stock that's a screaming buy in February is telecom company Verizon Communications (VZ 1.17%).
Legacy telecom providers have been hit with a bit of a double whammy over the past two years. The fastest rate-hiking cycle by the Federal Reserve in four decades could make future debt-financed deals and refinancing costlier.
The other issue for Verizon is the July report from The Wall Street Journal that alleges lead-sheathed cables still in use by legacy telecom companies could lead to environmental and health liabilities, as well as lofty replacement costs.
However, Verizon responded to the WSJ report by noting only a small percentage of its network utilizes lead-clad cables. It also noted that testing of its lead-sheathed cables is underway. The key point being that any potential liability for telecom companies would be determined by the U.S. court system. This is typically a multiyear process and doesn't pose any threat to telecom companies in the short run.
What investors should be focused on is Verizon's modest but steady growth propelled by the 5G revolution. Upgrading its network to handle faster download speeds is encouraging users to consume more data. Data happens to be where Verizon's wireless segment generates its juiciest margins.
The other key driver for Verizon is its broadband segment. Being able to offer 5G download speeds to residential customers has helped the company add at least 400,000 net broadband users for five consecutive quarters. Even though broadband isn't the growth driver it was two decades ago, it's good for an uptick in operating cash flow and has been known to encourage high-margin service bundling.
Let me also add that wireless service and internet access have become basic necessities. Consumers are highly unlikely to cancel these services, which makes Verizon's cash flow quite predictable year after year.
As with Altria and Pfizer, Verizon's valuation is attractive. Shares can be scooped up for less than 9x forward-year earnings, which provides a safe floor and modest upside for patient investors.
