Wall Street offers investors a multitude of pathways to grow their wealth. Among these countless strategies, few have delivered more robust long-term returns than buying and holding dividend stocks.
Last year, researchers at Hartford Funds released a lengthy report that examined the power and potential that dividend stocks bring to the table for long-term-minded investors. In particular, a collaboration with Ned Davis Research revealed a stark disparity in average annual returns between non-payers and companies that regularly pay a dividend.
According to the report ("The Power of Dividends: Past, Present, and Future"), non-payers were 18% more volatile than the benchmark S&P 500 and produced an average annual return of just 3.95% over a half-century (1973-2022). By comparison, companies that paid a dividend were 6% less volatile than the S&P 500 and more than doubled the average annual return (9.18%) of non-payers over the same timeline.
In other words, it's not a matter of if investors should add dividend stocks to their portfolio, but rather a debate over which income stocks they should buy.
Image source: Getty Images.
While certainly not everyone's cup of tea, vice stocks (also known as "sin stocks") have historically been exceptional dividend payers. Vice companies operate in industries that some investors may view as immoral or undesirable, such as the tobacco or fossil fuel industry. Despite the negative emotions sin stocks can evoke from some investors, they can make those willing to look past their faults considerably richer.
If you're wanting to generate $600 in super safe annual dividend income, simply invest $5,925 (split equally, three ways) in the following three ultra-high-yield vice stocks, which sport an average yield of 10.15%!
Altria Group: 9.11% yield
The first high-octane vice stock that can help you bring home $600 in annual dividend income from an initial investment of $5,925 split across three sin stocks is tobacco company Altria Group (MO 1.11%). Altria has raised its dividend 58 times over the last 54 years.
The obvious challenge for tobacco companies is that, over time, consumers have become increasingly aware of the potential dangers of long-term tobacco use. Altria operates in the United States and has seen the percentage of adults smoking cigarettes plummet from 42% in the mid-1960s to just 11.5%, as of 2021. Although a dramatically shrinking pool of customers would normally be a red flag from which no company comes back from, Altria has shown that it has a few tricks up its sleeve.
NYSE: MO
Key Data Points
The core advantage that all tobacco companies enjoy is strong pricing power. Tobacco contains nicotine, which is an addictive chemical. Despite some people quitting tobacco products altogether, those users who continue to smoke cigarettes have demonstrated a willingness to absorb hefty price increases. Even with cigarette shipments declining over time, Altria has been able to modestly move its revenue and profit needle higher by simply raising its prices.
To add to this point, Altria is the company behind the most-popular premium cigarette brand in the United States. Altria closed out 2023 with a nearly 47% share of the entire U.S. cigarette market, including all brands, with Marlboro alone comprising 42.1% of the U.S. market. Being the dominant choice for a lot of smokers makes it easier for Altria to raise its prices.
Altria has also made the move into smokeless products to enhance its long-term growth prospects. After swinging and missing with a sizable investment in electronic-vapor company Juul, Altria looks to have hit a home run with its $2.75 billion acquisition of NJOY Holdings, which closed this past June.
What differentiates NJOY from a veritable sea of e-vapor companies is that it's received a half-dozen marketing granted orders (MGOs) from the U.S. Food and Drug Administration. Whereas almost all e-vapor products lack MGOs and could, in theory, be pulled from retail shelves at any time, NJOY's products will remain on retail shelves. This acquisition positions Altria's growth rate to pick up in the latter-half of the decade.
NASDAQ: ARLP
Key Data Points
Alliance Resource Partners: 14.28% yield
A second ultra-high-yield sin stock that can help you generate $600 in super safe annual dividend income from a starting investment of $5,925 (split equally) is coal company Alliance Resource Partners (ARLP 2.23%). Alliance Resource is currently yielding a jaw-dropping 14.3%!
Entering this decade, most investors had written off coal stocks for dead. It was widely believed that historically low interest rates and the desire for developed countries to reduce their carbon footprints would (pardon the pun) fuel demand for solar and wind projects, among other clean-energy solutions. However, the COVID-19 pandemic changed everything.
For three years during the pandemic, global energy companies dramatically reduced their capital expenditures. We've also witnessed a rapid rise in interest rates over the last two years, which had spurred clean-energy projects. The end result has been a slower shift to clean-energy solutions and tight global oil supply. It's been coal companies like Alliance Resource Partners that have stepped up to meet growing global energy demand.
What's interesting about Alliance Resource Partners is that it's not just benefiting from a historically favorable coal price. Management deserves a lot of credit for consistently locking in volume and price commitments up to four years in advance. When the company issued its full-year outlook in late January, it had 93% of its production at the midpoint of its forecast for 2024 priced and committed, along with roughly 45% of its output in 2025. Locking these commitments in ahead of time helps to generate highly predictable operating cash flow year after year.
It's also worth pointing out that management hasn't overextended the company's balance sheet trying to expand production. Alliance Resource Partners has traditionally slow-stepped its expansion efforts to ensure that its outstanding debt remains manageable. This has been critical to sustaining a robust quarterly payout.
Furthermore, Alliance Resource Partners has been diversifying its operations beyond coal and into oil and natural gas royalties. Though royalties are a smaller part of its current operations, it can serve as a smart hedge in the event that coal prices retreat.
Image source: Getty Images.
Enterprise Products Partners: 7.06% yield
The third ultra-high-yield vice stock that can produce $600 in super safe annual dividend income from a beginning investment of $5,925 split equally among three stocks is oil and gas company Enterprise Products Partners (EPD 1.77%). Enterprise has raised its distribution in each of the past 25 years.
For some investors, the memory of the demand cliff for oil companies during the COVID-19 pandemic is still fresh. Drillers were absolutely clobbered by domestic and global lockdowns, which briefly sent crude oil futures contracts into the negative by more than $40 per barrel. Thankfully, Enterprise Products Partners was largely shielded from this historic volatility.
Enterprise's secret to success is that it's a midstream company. It's an energy middleman that oversees more than 50,000 miles of transmission pipeline and can store in excess of 260 million barrels of liquids and refined product.
NYSE: EPD
Key Data Points
Whereas upstream drillers tend to be highly dependent on the spot price of crude oil, Enterprise Products Partners relies heavily on long-term, fixed-fee contracts with drilling companies. Fixed-fee contracts remove the impact of inflation and spot-price changes from the equation and make Enterprise's operating cash flow highly predictable.
It can't be overstated how important cash-flow predictability is to a midstream juggernaut like Enterprise Products Partners. Being able to accurately forecast its cash flow one or more years in advance is what's historically given management the confidence the make regular bolt-on acquisitions, as well as put close to $7 billion to work in major infrastructure projects, many of which are aimed at bolstering its natural gas liquids operations.
Enterprise is also benefiting from global crude oil supply constraints. Russia's ongoing war with Ukraine, coupled with years of global underinvestment from energy majors, is liable to buoy the spot price of crude oil and encourage domestic drillers to increase their production. That's music to the ears of one of America's top midstream energy companies.
