Wall Street has been making investors richer for more than a century. Thanks to thousands of publicly traded companies and exchange-traded funds, there’s a strategy that can fit any investment style and risk tolerance. But when push comes to shove, buying and holding dividend stocks is an investment plan that’s tough to beat.
Last year, Hartford Funds issued a report {“The Power of Dividends: Past, Present, and Future”) that examined the outperformance and volatility-reducing tendencies of dividend stocks. In particular, a collaboration with Ned Davis Research revealed that companies paying dividends averaged an annual return of 9.18% over a half century (1973-2022). This compared to a considerably more modest average annual return of 3.95% for the public companies that didn’t offer a payout over the same period.
What can make dividend investing challenging is the desire to maximize yield while also minimizing risk. Statistically speaking, the higher the yield, usually the more inherent risk. Thankfully, proper vetting can unveil some true gems with ultra-high yields — i.e., yields that are four or more times greater than the benchmark S&P 500.
What follows are three magnificent ultra-high-yield dividend stocks — sporting an average yield of 8.84% — that are screaming buys in March.
Pfizer: 6.33% yield
The first sensational dividend stock with a high-octane yield that’s worth scooping up in March is pharmaceutical juggernaut Pfizer (PFE). Due to the poor performance of its stock in recent quarters, the company’s yield has surged to 6.3%.
The weakness in Pfizer’s stock can be traced to two issues. First, the worst of the COVID-19 pandemic is now over. Pfizer developed a vaccine (Comirnaty) and oral treatment (Paxlovid) for COVID-19, which resulted in more than $56 billion in combined sales in 2022. In 2024, the company is forecasting closer to $8 billion in combined revenue for both drugs. That’s a wild ride in the span of a couple of years.
The other reason for investor skepticism is that its recent acquisition of cancer-drug developer Seagen will result in a roughly $0.40-per-share hit to its earnings this year.
On the other hand, the costs associated with buying Seagen are strictly confined to the current year. Looking beyond 2024, the combined company will enjoy cost savings and a considerably more robust oncology pipeline. The long-term benefits of this combination handily outweigh any very-near-term acquisition-related expenses.
As for Pfizer’s wild revenue ride caused by its COVID-19 therapies, investors should note that sans COVID-19 products, Pfizer’s sales have continued to climb and are expected to move higher, once more, in 2024. In particular, double-digit currency-neutral sales growth from its specialty care segment has been carrying the torch as COVID-19 drug sales normalize.
Something else working in Pfizer’s favor is the fact that healthcare is an exceptionally defensive sector. Regardless of whether the U.S. economy is growing or contracting, patients will always need healthcare services and prescription medicines. Pfizer’s operating cash flow is transparent and highly predictable, which is why its dividend is rock-solid.
Shares of Pfizer can currently be scooped up for less than 10 times forward-year earnings, which represents a 12% discount to its average forward-year earnings multiple over the trailing-five-year period.
Annaly Capital Management: 13.62% yield
A second ultra-high-yield dividend stock that stands out as a contrarian screaming buy in March is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY). Annaly has declared $25 billion worth of dividend payments since its initial public offering in October 1997, and it’s averaged around a 10% yield over the past two decades. Its current yield of 13.6% isn’t out of the norm.
The problem for the mortgage REIT industry is that it’s highly interest sensitive. The Federal Reserve raising interest rates at the fastest clip in more than four decades left little time for Annaly and its peers to adjust their portfolios. Short-term borrowing costs quickly rose, which crimped the company’s net interest margin.
Though there’s arguably not an industry that’s more universally disliked by Wall Street than mortgage REITs, there does appear to be a light at the end of the tunnel for Annaly Capital Management and its peers.
Although the industry performs its best when interest rates are low or declining, the simple fact that the nation’s central bank has paused its rate-hiking cycle is giving Annaly time to adjust its holdings. Slow-stepped, methodical changes by the Fed can allow Annaly to maximize its profitability.
Additionally, the Fed’s quantitative tightening measures also mean it’s no longer purchasing mortgage-backed securities (MBS). Not having the nation’s central bank scooping up lucrative MBSs should help Annaly snag higher-yielding MBS that raise the average yield of its asset portfolio over time.
Another important point that shouldn’t be overlooked is the composition of Annaly Capital Management’s investment portfolio. As of the end of 2023, $65.7 billion of its $74.3 billion portfolio was put to work in highly liquid agency assets. An “agency” asset is backed by the federal government in the unlikely event of default. This added protection is what allows Annaly the luxury of using leverage to its advantage.
With Annaly trading slightly below its book value, and the nation’s central bank slow-stepping its next move, now is the perfect time to buy into this supercharged dividend stock.
AT&T: 6.56% yield
The third magnificent ultra-high-yield stock that’s begging to be bought in March is none other than telecom stalwart AT&T (T).
In addition to its short-lived wireless network outage last week, AT&T has been contending with two significant headwinds. Firstly, higher interest rates could make future refinancing and dealmaking costlier for the company. The other is the July 2023 report from The Wall Street Journal that alleged legacy telecom companies using lead-clad cables could face sizable environmental and health-related liabilities.
However, AT&T directly refuted the WSJ‘s findings. It’s found no evidence of environmental or health hazards with its lead-sheathed cables. Further, if the company eventually does have some sort of financial liability, it would be determined by the U.S. court system. We’re talking about something that would be many years down the road, if ever.
Current and prospective investors shouldn’t concern themselves with rapidly rising interest rates, either. Since AT&T spun off its content arm WarnerMedia in April 2022, its net debt has declined from $169 billion to $128.9 billion. While there’s still plenty of work to do to organically reduce its net debt, there’s now ample financial flexibility and zero concern about AT&T’s ability to sustain its current 6.6% yield.
Beyond these headwinds, investors will find that AT&T continues to modestly move the needle in the right direction. Upgrading its network to support 5G download speeds helped push domestic wireless service revenue higher by more than 5% last year. The company also added more than 1 million net broadband subscribers for a sixth consecutive year.
Furthermore, telecom companies benefit from the cash-flow predictability of the services they provide. Over time, wireless service and internet access have become basic necessities. It’s unlikely that consumers will cancel these services to save money during economic downturns.
The final piece of the puzzle with AT&T is its valuation. Shares can be picked up for just 7 times forward-year earnings, which is historically cheap… even for telecom stocks.
— Sean Williams
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Source: The Motley Fool