One of the greatest aspects of putting your money to work on Wall Street is that there’s an investment strategy that can work for everyone. Regardless of how much money you have to invest or your risk tolerance, there are stocks and/or exchange-traded funds (ETFs) that can grow your wealth.
But among these seemingly countless strategies, buying and holding high-quality dividend stocks over long periods is tough to beat.
Last year, the Hartford Funds published an extensive report (“The Power of Dividends: Past, Present, and Future”) extolling the greatness that is dividend stocks. In particular, researchers at Hartford Funds, in collaboration with Ned Davis Research, examined the annualized performance of income stocks, compared to non-payers, over a half-century (1973-2022). While the non-payers generated a relatively modest average annual return of 3.95% spanning five decades, the dividend payers more than doubled the annualized return of the non-payers — 9.18% over 50 years.
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What’s arguably most challenging for income seekers is weighing the risks associated with high-yield dividend stocks. Generally, the higher the yield, the more inherent risk there is for investors. However, this isn’t always the case.
If you want $300 in exceptionally safe annual dividend income, you can get it by investing $4,975 (split equally, three ways) into the following three high-yield stocks, which sport an average yield of 6.05%!
Realty Income: 5.85% yield
The first high-octane dividend stock that can help you bring home super safe annual income is retail real estate investment trust (REIT) Realty Income (O -0.25%). Realty Income has raised its payout 123 times since going public, and it doles out its dividend on a monthly basis.
The clearest headwind for all REITs over the past two years has been the Federal Reserve’s hawkish monetary policy. The fastest rate-hiking cycle in four decades has made it costlier to borrow. More importantly, it’s sent Treasury bond yields soaring. When bond yields outpace the prevailing inflation rate, it can make bonds more desirable than stocks.
The counter to this headwind is that Realty Income isn’t just a run-of-the-mill REIT. It’s the retail REIT that pretty much every other retail REIT tries to mirror.
What’s helped set Realty Income apart from its peers, aside from the size of its commercial real estate (CRE) portfolio, is that it primarily leases to retailers that are resilient to economic downturns. According to the company, approximately 91% of its total rent is resilient to economic contractions or pressure from online retailers. This is because the company’s renters are primarily found in industries that draw customer traffic in any economic climate. I’m talking about grocery stores, convenience stores, dollar stores, drug stores, and home improvement stores, which collectively account for almost 41% of the company’s annualized contractual rent.
Another reason Realty Income has set the standard among retail REITs is its ability to diversify its more than 13,000-property CRE portfolio. Last month, it closed its all-share acquisition of Spirit Realty Capital, which enhanced its existing CRE portfolio, as well as expanded Realty Income into new industries. Over the past two years, Realty Income has also made two deals in the gaming space, which further diversifies its lease exposure beyond the traditional retail industry.
The cherry on top for income investors is that Realty Income is cheaper now than it’s been in at least a decade. Shares can be purchased for 11.6x forward-year cash flow, which represents a 38% discount to the company’s average multiple to cash flow over the trailing five years.
Philip Morris International: 5.78% yield
A second high-yield stock that can deliver $300 in exceptionally safe annual dividend income from an initial investment of $4,975 (split across three stocks) is tobacco company Philip Morris International (PM 0.03%).
The biggest problem for Philip Morris is that consumers have, over time, wised up about the potential dangers of long-term tobacco use. As a result, cigarette shipments have been declining in developed markets. While a shrinking pool of consumers would normally be a major red flag, a tobacco giant like Philip Morris has easily identifiable competitive advantages in its corner.
To start with, tobacco products contain nicotine, which is an addictive chemical. Tobacco companies haven’t had any trouble raising their prices to more than offset declines in cigarette shipments, as well as inflation. In other words, exceptional pricing power is helping Philip Morris and its peers grow their bottom lines.
Another reason Philip Morris has proved unstoppable is its geographic reach. It’s currently operating in more than 180 countries. If it’s contending with shipment declines in select developed markets, there’s a good chance it’s offsetting these drops with increased demand for tobacco products in emerging markets where tobacco remains something of a luxury.
But the most exciting development for Philip Morris and its prospective and existing shareholders is the growth it’s seen in its smokeless tobacco products. Specifically, the company’s Iqos system has gobbled up more than 9% of the global heated tobacco market. in 2023, heated tobacco unit shipment volume surged by almost 15% to 125.3 billion.
The final catalyst that makes Philip Morris a smoking-hot investment — other than its 5.8% yield — is its valuation. Philip Morris’ forward-year earnings multiple of 12.7 is a marked 17% discount to its forward price-to-earnings (P/E) multiple over the trailing five years.
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AT&T: 6.52% yield
The third high-yield stock that can produce $300 in exceptionally safe annual dividend income from a starting investment of $4,975, split equally among three stocks, is none other than telecom company AT&T (T 0.06%). AT&T’s 6.5% yield is the high-water mark on this list.
Telecom stocks took a beating in 2023 following a July report from The Wall Street Journal that alleged legacy providers using lead-clad cables could face sizable environmental- and health-related liabilities. This concern, coupled with rapidly rising interest rates (legacy telecom companies are lugging around quite a bit of debt), weighed heavily on the industry.
But when examined with a broader lens, the WSJ report looks like a short-term nothingburger. AT&T notes that lead-sheathed cables make up only a small percentage of its network, and has previously pointed out that testing of these cables didn’t turn up any health-related concerns. Even if telecom companies were to eventually face some form of financial liability, it would likely be determined in the U.S. court system, which often takes years.
What investors should be paying attention to is AT&T’s steadily improved operating performance. Upgrading its network to support 5G download speeds is encouraging wireless users to consume more data. Full-year mobility service revenue rose 4.4%, with the company’s wireless segment registering its highest-ever operating income.
Perhaps even more impressive is the growth AT&T has delivered from its broadband operations. The 1.1 million net additions in 2023 marked the company’s sixth consecutive year where it’s added at least 1 million net subscribers. Broadband marks an easy way for AT&T to encourage high-margin service bundling that keeps consumers loyal to its ecosystem of products and services.
AT&T’s balance sheet has demonstrably improved, too. Since the end of March 2022, AT&T’s net debt has declined by roughly $40 billion to $128.9 billion. Organic paydown and the divestment of its content arm, WarnerMedia, have meaningfully improved the company’s financial flexibility.
Valuation marks the last reason income investors can confidently buy AT&T. A forward P/E ratio of 7.4 provides a very favorable risk versus reward for the company’s current and prospective shareholders.
