For well over a century, no asset class has come close to rivaling the annualized returns stocks have delivered for investors. With thousands of tradable securities, including exchange-traded funds (ETFs), Wall Street offers investors of all walks and risk tolerances a path to grow their wealth.
But among these seemingly countless pathways to riches is one that's undeniably toward the top of the pack: buying and holding high-quality dividend stocks.
Last year, Hartford Funds released a lengthy report ("The Power of Dividends: Past, Present, and Future") that examined the multiple ways dividend stocks have outperformed non-payers over extended periods.
Image source: Getty Images.
In a collaboration with Ned Davis Research, Hartford Funds noted that dividend-paying companies produced an average annual return of 9.18% spanning 50 years (1973-2022), and did so while being 6% less volatile than the benchmark S&P 500. By comparison, the average annual return from non-payers was less than half that of dividend stocks (3.95%) over a half-century, and the non-payers were 18% more volatile than the broad-based S&P 500.
Companies that pay a consistent dividend to their shareholders are usually profitable on a recurring basis and time-tested. In short, they're just the type of businesses we'd expect to increase their valuations over the long term.
However, income seekers don't have to settle for paltry yields when seeking out dividend stocks to buy. Although studies have shown that yield and risk have a tendency to go hand-in-hand -- i.e., high-yield stocks come with added risks -- proper vetting can reveal some high-octane income gems.
As we leap into April, three magnificent ultra-high-yield stocks, with an average yield of 9.02%, stand out as screaming buys.
Pfizer: 6.05% yield
The first amazing dividend stock with a premium yield that you can confidently add to your portfolio in April is none other than pharmaceutical juggernaut Pfizer (PFE 0.14%).
Pfizer stock recently hit a decade-low, with the overhang from the COVID-19 pandemic acting as a cement weight around its proverbial ankles. As one of the few companies to successfully develop a COVID-19 vaccine (Comirnaty), as well as an oral tablet designed to lessen the severity of COVID-19 (Paxlovid), Pfizer's sales soared during the early stages of the pandemic. But with the worst now behind us, combined sales of these drugs have tumbled from over $56 billion in 2022 to an estimated $8 billion this year.
NYSE: PFE
Key Data Points
While this seesaw in sales has crimped the necks of Wall Street analysts, some investors have clearly lost sight that Pfizer is far better off now, from a financial standpoint, than it was prior to the pandemic. Not only is it generating an extra $8 billion in annual sales from its core COVID-19 lineup, but the company's vast non-COVID portfolio of therapeutics has continued to grow on an organic basis.
For example, if sales for Comirnaty and Paxlovid are stripped out, operating revenue for all of Pfizer's other novel drugs rose by 7% in 2023. The company's guidance calls for another 3% to 5% operating sales growth, sans Comirnaty and Paxlovid, in 2024.
Something else to note is that Pfizer's bottom line will take an approximate $0.40-per-share hit this year following the acquisition of cancer-drug developer Seagen. This is a temporary speed bump that will give way to cost-savings and a vastly superior cancer-drug pipeline and product portfolio beginning in 2025.
The highly defensive nature of the healthcare sector is another reason income investors can trust Pfizer. No matter what's happening with the stock market or U.S. economy, people still need prescription medicines. This tends to lead to highly predictable operating cash flow in any economic climate.
Shares of Pfizer can be scooped up right now for just 11 times forward-year earnings, which is an attractive valuation for a company that'll pay you more than 6% annually to be patient.
NYSE: IIPR
Key Data Points
Innovative Industrial Properties: 7.03% yield
A second magnificent ultra-high-yield dividend stock that's begging to be bought in April is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR +0.38%). "IIP," as the company is more commonly known, has increased its quarterly payout by 1,113% since issuing its first distribution in July 2017.
IIP has contended with two very clear headwinds. First, marijuana stocks lost their buzz in early 2021 after it became clear that the Biden administration and a Democrat-led Congress wouldn't be passing much in the way of cannabis-reform measures.
The other issue is that a small number of IIP's tenants became delinquent on their rent early in 2023. All REITs eventually deal with delinquencies, and it's how they respond to these challenges that dictates their outlook. IIP's management team was able to rework some of its master-lease agreements, as well as sell a couple of properties, to move its rent collection rate back to 100% by February 2024.
One of the factors that makes Innovative Industrial Properties such a smart buy for REIT investors is that a vast majority (95.8%) of its asset portfolio of more than 100 properties is triple-net leased. A triple-net lease requires the tenant to cover all expenses pertaining to the property, including utilities, maintenance, property taxes, and insurance premiums. While rental rates are lower for triple-net leases, it also absolves IIP from dealing with surprise expenses.
Interestingly enough, IIP is one of the few companies that's actually benefiting from the congressional stalemate on cannabis reform. Since most multi-state operators (MSOs) have limited access to basic financial services, IIP has leaned on sale-leaseback agreements as a solution. IIP purchases medical marijuana cultivation and/or processing assets from MSOs using cash and immediately leases the property back to the seller. This nets IIP a long-term tenant and yields highly predictable cash flow.
Given the long-term growth potential of legalized cannabis in the U.S., Innovative Industrial Properties' forward price-to-earnings (P/E) ratio of less than 18, and its 7% yield, are both enticing.
Image source: Getty Images.
Alliance Resource Partners: 13.97% yield
The third magnificent ultra-high-yield dividend stock that makes for a screaming buy in April is coal company Alliance Resource Partners (ARLP 1.56%). Yes, you did read that correctly -- I said, "coal company."
Entering the decade, coal stocks were left for dead. Historically low interest rates and a strong U.S. economy were expected to fuel global investment in wind and solar solutions. However, the arrival of the COVID-19 pandemic changed those plans.
During the pandemic, global energy companies were forced to significantly reduce their capital spending due to a historic demand cliff for energy commodities. In the wake of the pandemic, domestic interest rates have soared and global crude oil supply has remained tight. It's coal companies like Alliance Resource Partners that have stepped up to fill the energy-demand void.
NASDAQ: ARLP
Key Data Points
Although Alliance Resource Partners has enjoyed selling its coal at a historically high per-ton price, much of the company's success can be attributed to its management team. In particular, Alliance Resource has historically booked production up to four years in advance. Locking in volume and price commitments years in advance provides the transparency to cash flow needed to make confidently make acquisitions, expand production, and pay a hefty distribution without adversely impacting profits.
To add to the above, Alliance Resource Partners' management team has always slow-stepped its production expansion. Doing so has ensured that the company's debt level remains manageable, which hasn't always been the case for its peers.
Lastly, the company has diversified its revenue channel by acquiring 67,700 acres' worth of royalty oil and gas interests. If the spot price of energy commodities remains high, earnings before interest, taxes, depreciation, and amortization (EBITDA) should push higher from this royalty segment.
A forward P/E ratio of around 5, coupled with a 14% yield, makes Alliance Resource Partners one of the cheapest supercharged dividend stocks on the planet.
