Over the last century, Wall Street has been a virtually unstoppable wealth creator for patient investors. Although other asset classes have helped build nominal wealth, such as oil, gold, bonds, and housing, none comes close to the annualized average returns over the last 100 years that stocks have brought to the table.
With thousands of publicly traded companies and exchange-traded funds to choose from, there's an investment strategy that fits the goals and risk tolerance of just about every investor. But among these countless strategies, few can hold a candle to the juicy returns delivered from buying and holding high-quality dividend stocks over an extended period.
Last year, the investment researchers at Hartford Funds released a detailed report ("The Power of Dividends: Past, Present, and Future") that examined the many ways dividend-paying companies have outperformed non-payers over the long run.
Image source: Getty Images.
In a collaboration with Ned Davis Research, recently updated data from this report finds that dividend-paying companies have more than doubled the annual average return of public companies that don't pay a dividend over the last 50 years (1973-2023): 9.17% vs. 4.27%. Further, the dividend payers were, on average, 6% less volatile than the S&P 500, while the non-payers were 18% more volatile.
Perhaps the best thing about investing in dividend stocks is that value can always be found -- even with Wall Street's major stock indexes hitting fresh all-time highs. The real challenge is deciding which dividend stocks to invest in, because not all dividend payers are created equally.
Companies with the ability to increase their dividend payouts year after year are typically time-tested, recurringly profitable, and capable of providing transparent long-term growth outlooks. In other words, they're just the type of companies we'd expect to increase in value over the long run.
At the moment, two magnificent ultra-high-yield dividend stocks -- "ultra-high-yield" stocks have yields that are four or more times higher than the S&P 500s yield -- that are working on base annual payout increase streaks of at least 25 years are ripe for the picking by opportunistic income seekers.
Realty Income: 6.04% yield
The first high-octane dividend stock with an extensive streak of increasing its base annual payout that's begging to be bought right now is the premier company among retail real estate investment trusts (REITs), Realty Income (O 1.42%).
Realty Income has increased its monthly distribution for 107 consecutive quarters. O Dividend data by YCharts.
Less than two weeks ago, Realty Income declared its 647th consecutive monthly dividend and has increased its payout in each of the past 107 quarters (that's nearly 27 years). Based on its newly announced monthly distribution of $0.2625 per share, Realty Income's forward dividend yield has, once again, topped 6%.
The primary reason the last two years have been challenging for Realty Income's stock is the Federal Reserve's hawkish monetary policy. The steepest rate-hiking cycle in four decades sent short-term Treasury bill yields soaring to around 5%. Treasury bills offer effectively no risk to an investors' principle, and have thus been more attractive than higher-yielding REITs in recent quarters.
But at some point, the value proposition of REITs begins to outweigh this risk/reward scenario -- and I'd strongly argue we've hit that point with this leading retail REIT.
Following the completion of its Spirit Realty Capital acquisition in January, Realty Income ended the first quarter with 15,485 commercial real estate (CRE) properties in its portfolio. It estimates that approximately 90% of the total rent that it collects from these CRE properties is resilient to an economic downturn and the pressures from e-commerce.
NYSE: O
Key Data Points
The secret? Realty Income prominently rents to stand-alone retailers that sell basic necessity goods or provide basic need services. Grocery stores, convenience stores, dollar stores, home improvement stores, drug stores, and automotive service locations make up nearly 42% of its annualized contractual rent. These are businesses that are going to generate predictable cash flow in pretty much any economic climate.
The real advantage of leasing to high-quality, stand-alone businesses in basic necessity industries is not having to worry about finding new tenants or getting paid. Since the start of this century, the median S&P 500 REIT has enjoyed a respectable 94.2% occupancy rate. Realty Income's median occupancy rate is 98.2% over the last 23 years and change. It's easy to raise the company's dividend for 107 consecutive quarters when tenants generate predictable cash flow and pay their bills.
In addition to its top-tier retail CRE portfolio, Realty Income has been expanding into new verticals. It's completed two deals in the gaming industry over the last two years, purchased Spirit Realty Capital to diversify its revenue stream, and formed a joint venture with Digital Realty Trust to develop build-to-suit data centers for lease. Yes, this means Realty Income can benefit from the artificial intelligence (AI) revolution over the long run.
Best of all, Realty Income's stock is cheaper than it's been in more than a decade. The 11.6 multiple to forward-year cash flow Realty Income closed at on May 24 represents a 33% discount to its average multiple to cash flow over the last five years.
Image source: Getty Images.
Enterprise Products Partners: 7.3% yield
The second ultra-high-yield dividend stock sporting a 25-year payout increase streak is energy juggernaut Enterprise Products Partners (EPD +0.81%). Enterprise doles out its dividend quarterly and has been increasing its base annual distribution since becoming a public company in July 1998. Its forward yield, based on its current distribution, is an S&P 500-crushing 7.3%, and it's returned an aggregate of $53.2 billion to its investors, including buybacks, since going public.
To be fair, oil and gas stocks aren't going to be everyone's cup of tea. The fossil fuel industry is viewed a "sin" industry by some investors.
Further, the historic drop-off in crude oil and natural gas demand four years ago during the early stages of COVID-19 pandemic lockdowns is still fresh in the minds of many investors. Drilling companies were absolutely clobbered when crude oil futures briefly crashed to negative $40 per barrel.
Enterprise Products Partners has increased its base annual distribution in each of the last 25 years. EPD Dividend data by YCharts.
But if you can overcome this recency bias and have no qualms about investing in the U.S. fossil fuel industry, Enterprise Products Partners has the necessary tools to make patient income seekers notably richer.
The reason Enterprise has been such a phenomenal investment for so long is because it's not a driller. It's a vital energy middleman for the U.S. fossil fuel industry. It operates more than 50,000 miles of transmission pipeline, 26 fractionation facilities, and can store 14 billion cubic feet of natural gas and in excess of 300 million barrels of petroleum/refined liquids.
The beauty of being one of North America's largest midstream operators is that it's able to secure long-term, fixed-fee contracts with drilling companies. Most of the company's contracts are fixed-fee, which removes spot price volatility from the equation. Being able to transparently and accurately forecast cash flow a year or more in advance is what's given Enterprise Products Partners' management team the confidence to raise its distribution, undertake new projects, and make earnings-accretive acquisitions.
In terms of major projects, the company has green-lit nearly $7 billion in spending. Most of these projects, which are focused on expanding the company's natural gas liquids (NGLs) segment, are slated to come online before the end of 2025. Capital spending should decline by $1 billion (or more) in 2026, likely leading to even faster earnings growth.
NYSE: EPD
Key Data Points
Meanwhile, a steady diet of bolt-on acquisitions has expanded the reach of Enterprise's pipelines and fattened its cash flow. Three months ago, Enterprise Products Partners agreed to pay $375 million to Western Midstream Partners for the remaining 20% interest in the 620,000-barrel-per-day Whitethorn pipeline it didn't already own, as well as the remaining 25% equity interest in two NGL fractionators it didn't own. There's plenty of incentive for Enterprise to add on pipeline and NGL interests in the future.
Enterprise Products Partners should also be a clear-cut beneficiary of reduced capital spending by energy majors following the worst of the COVID-19 pandemic. Years of reduced spending has constrained the global supply of oil and helped to boost its spot price. A higher sustained price for crude oil is liable to encourage more domestic drilling and help Enterprise secure more lucrative contracts.
Enterprise Products Partners looks like a screaming bargain at roughly 7 times forward-year cash flow and just shy of 10 times forward-year earnings.
