The Federal Reserve's pivot to lower interest rates will have ripple effects throughout the economy and send investors looking for passive income to new places. As yields fall in vehicles like high-yield savings accounts, investors could turn to high-quality, high-yield dividend stocks. Consumer spending and healthcare are two pillars of the U.S. economy, and great places to look for such stocks.
I've identified three stocks with generous yields and the financials to afford their payouts. These companies also boast durable business models that should thrive through recessions, giving income-focused investors peace of mind.
1. Pfizer
Current yield: 5.8%
Pharmaceutical giant Pfizer (PFE 0.19%) was a big winner during COVID-19's height due to its vaccine and treatment products, which created a temporary growth wave. However, the tide has gone out over the past couple of years, and the stock has plunged to multi-year lows as revenue and earnings contract.
But the company is poised to resume growth, with analysts anticipating 8% to 9% annual earnings growth for the next three to five years. Pfizer has pivoted its business to focus on oncology, using its pandemic profits to acquire Seagen for $43 billion last year.
NYSE: PFE
Key Data Points
Management raised Pfizer's dividend by 2.4% last December, a sign of confidence the payout is safe. The payout ratio is also getting healthier. The dividend is approximately 64% of estimated 2024 earnings, so Pfizer seems poised to continue extending its streak of 15 years of increases. The stock trades at only 11 times its estimated 2024 earnings, a sharp discount to the broader market and an attractive price for a business with high single-digit earnings growth.
Pfizer represents a rock-solid income investment with the potential for capital appreciation ahead.
2. Altria
Current yield: 8%
Tobacco companies are renowned dividend stocks, and Altria (MO 1.61%) is an excellent example, having showered shareholders with cash for decades. The company sells Marlboro cigarettes and leading brands of cigars, chewing tobacco, and smokeless products in the United States. The company is also a Dividend King, meaning that it has raised its dividend for more than five decades, a testament to how durable the tobacco industry is despite declining smoking rates.
The dividend remains in good financial health, with a payout ratio of 80% of estimated 2024 earnings. That dividend is backed by an investment-grade balance sheet and a multi-billion-dollar stake in Anheuser-Busch, which the company could liquidate as needed.
NYSE: MO
Key Data Points
Altria's cigarette shipments decline almost annually, but a combination of price increases and share repurchases continues inching earnings higher. Analysts estimate that the company will grow earnings by an average of 3% to 4% over the next three to five years, which means the dividend will continue inching higher, too.
Shares trade at 10 times Altria's estimated 2024 earnings, but I'd hesitate to call the stock a bargain due to its low growth. However, you don't need much when getting an 8% dividend yield. Those ultimately concerned with investment income will struggle to find a similarly safe yield this high.
3. Realty Income
Current yield: 5%
Real estate is one of society's oldest industries, and real estate investment trusts (REITs) like Realty Income (O 2.95%) enable people to invest in real estate without directly owning property. REITs acquire and lease real estate, and then distribute most of their income to shareholders. That makes Realty Income an excellent dividend stock.
The company has paid and raised its dividend for 29 consecutive years, and the payout ratio is still just 75% of this year's estimated funds from operations (FFO). Plus, Realty Income pays a monthly dividend, a perk for investors who want regular cash flow to help pay their bills.
NYSE: O
Key Data Points
Realty Income has thrived through economic ups and downs because it focuses on renting to retail businesses that people use regardless of what the economy is doing. Think grocery stores, restaurants, convenience stores, and pharmacies. Realty Income leases over 15,000 properties, so it's a vast and diverse portfolio that generates steady rental income for the company.
Lower interest rates are a bonus for REITs like Realty Income because they often borrow to fund their property acquisitions. Cheaper borrowing costs should make Realty Income more profitable.
Realty Income trades at almost 15 times its estimated 2024 FFO, a fair price given the company's bright outlook and reliable and growing dividend.
