3 Ultra-High-Yield Stocks Can Deliver For Years to Come

There is no one-size-fits-all blueprint to build wealth on Wall Street. As long as you have a long-term mindset, a bevy of investment strategies can be used to grow your nest egg. But among these countless strategies, few have performed better over the long haul than buying dividend stocks.

Publicly traded companies that pay a regular dividend are almost always profitable and capable of providing transparent growth outlooks to their shareholders. Perhaps more importantly, income stocks are typically time-tested. These are businesses that have navigated their way through downturns before, which means investors can sleep easy at night owning them.

Dividend stocks also provide a rich history of outperformance when compared to publicly traded companies that don’t offer a payout. When the wealth management division of JPMorgan Chase compared the annualized returns of dividend-paying stocks to nonpayers over a 40-year period (1972-2012), it found that the income stocks absolutely crushed those not doling out a dividend (9.5% annualized return versus 1.6% annualized return).

However, picking out a dividend stock to add to your portfolio isn’t as easy as blindly throwing a dart at a financial newspaper. Although studies have shown that income stocks outperform, as a whole, when compared to nonpayers, investment risk also tends to rise in lockstep with yield. In simpler terms, ultra-high-yield stocks — an arbitrary phrase I’m using to describe stocks with yields of 7% and above — can sometimes be more trouble than they’re worth.

Thankfully, not all ultra-high-yield stocks are trouble. In fact, some can be counted on to deliver outsized payouts for years to come.

If you want to generate $300 in super safe annual dividend income, simply invest $2,600 (split equally, three ways) in the following three ultra-high-yield stocks, which sport a scorching-hot average yield of 11.56%!

AT&T: 7.73% yield
The first supercharged dividend stock that can deliver exceptionally safe income is legacy telecom company AT&T (T).

Over the summer, shares of AT&T were clobbered after a report from The Wall Street Journal highlighted the use of lead-clad cables by legacy telecom companies and speculated what financial liabilities these companies might face to replace these cables.

On a grander scale, rapidly rising interest rates and higher bond yields have also weighed on AT&T. Telecom companies regularly rely on debt to finance major projects and acquisitions. Higher interest rates mean future debt-financed deals and projects will be costlier. Meanwhile, juicier Treasury bond yields often make owning dividend stocks less attractive.

While these are real concerns that should be acknowledged by investors, these headwinds aren’t the game changers AT&T’s share price makes them out to be.

For instance, only a small percentage of AT&T’s network is currently using lead-clad cables. If the company were to have some sort of environmental or financial liability tied to the use of these cables, it would be determined in court. In short, any potential monetary liability for AT&T is many years down the road.

What’s even more important to note is that AT&T’s balance sheet has meaningfully improved since the company spun off WarnerMedia in April 2022. When WarnerMedia was spun off and merged with Discovery to create Warner Bros. Discovery, the new media entity assumed certain lots of debt previously held by AT&T, as well as made a cash payment to AT&T. The aggregate of these concessions totaled $40.4 billion.

From March 31, 2022, to June 30, 2023, AT&T’s net debt fell from $169 billion to $132 billion. While AT&T still has plenty of work to do to reduce its outstanding debt, it’s meaningfully improved its financial flexibility.

The 5G revolution is working in AT&T’s favor as well. The first upgrade to wireless download speeds in about a decade has consumers and businesses eager to replace their old wireless devices. This is leading to an increase in data consumption, which should help lift the operating margin of AT&T’s wireless segment. Broadband is no slouch, either, with AT&T adding at least 1 million net broadband customers in each of the past five years.

AT&T looks to have an attractive risk-versus-reward profile, with a forward price-to-earnings ratio of 6 and a dividend yield approaching 8%.

Alliance Resource Partners: 12.12% yield
A second ultra-high-yield stock that can help produce $300 in super safe annual dividend income from a beginning investment of $2,600 (split equally, three ways) is coal producer Alliance Resource Partners (ARLP).

Rarely, if ever, are the words “super safe,” “dividend,” and “coal stock” used in the same sentence. Most coal stocks are lugging around sizable debt loads and are widely viewed by Wall Street as yesterday’s news. The desire of the U.S. and other major economic powers to reduce their carbon footprints was believed to be a death knell for coal companies.

However, the COVID-19 pandemic changed everything. Since the pandemic began, most oil and gas producers have substantially pared back their capital expenditures. Even with the spot price of crude oil surging, supply constraints could last for years.

The big winner of crude oil supply chain disruptions is none other than coal stocks like Alliance Resource Partners. Even though the per-tonne price for coal has declined by more than 65% from its September 2022 peak, it’s still nearly double the average per-tonne price between 2013 and 2020.

But it’s not just higher coal prices that are fueling Alliance Resource Partners’ bottom line. The company’s management team also deserves plenty of credit.

For one, Alliance Resource Partners regularly books production up to four years in advance. With the price of coal well above historic norms, having a significant percentage of its production priced and committed months or years in advance makes the company’s operating cash flow highly predictable.

Additionally, the company’s management team has often slow-stepped increases in production. This conservative approach to expansion has kept Alliance Resource Partners from taking on too much debt. As a result, it has far more financial flexibility than its peers.

Lastly, Alliance Resource Partners has diversified its operations in recent years to include oil and natural gas royalties. The aforementioned supply chain challenges for crude oil have lifted spot prices and substantially increased Alliance Resource’s earnings before interest, taxes, depreciation, and amortization (EBITDA) from its royalty segment.

Annaly Capital Management: 14.83% yield
The third ultra-high-yield stock that can help you bring home $300 in super safe annual dividend income from a starting investment of $2,600 (split equally, three ways) is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY). Annaly has returned over $24 billion to its investors as dividends since going public in 1997, and it’s averaged a double-digit yield over the past two decades. In other words, its 14.8% yield isn’t out of the ordinary.

Although the products mortgage REITs purchase can be somewhat complex, the operating model for these companies is straightforward. Mortgage REITs aim to borrow money at low short-term rates and use this capital to purchase higher-yielding long-term assets, like mortgage-backed securities (MBS). Their goal is to generate the highest net interest margin possible. By net interest margin, I’m referring to the average yield on owned assets, less the average borrowing rate.

The current operating environment for mortgage REITs is probably the most difficult these companies have ever endured. These are interest rate-sensitive businesses that have been clobbered by the fastest pace of Federal Reserve rate hikes in four decades. Likewise, an inverted Treasury yield curve is doing no favors to the net interest margin of the companies in this industry.

But when things look their bleakest for mortgage REITs is precisely when they’re their most attractive.

While a low interest rate environment is preferable for Annaly, there is a longer-term benefit to a 525-basis-point uptick in the federal funds rate. The new MBSs Annaly is buying will sport significantly higher yields. Over time, this should lift the average yield of the company’s investment portfolio and help widen its net interest margin.

To add to this point, the Federal Reserve is backing away from the MBS market. With the central bank no longer purchasing MBSs, less competition should lead to greater opportunities for Annaly to snag juicier long-term yields on the products it’s buying.

The composition of Annaly Capital Management’s investment portfolio is another reason investors can trust this high-octane income stock. As of June 30, approximately 90% of its $78.9 billion investment portfolio consisted of highly liquid agency securities. “Agency” assets are backed by the federal government in the event of default. Buying these protected assets allows Annaly to leverage its portfolio and magnify its profit potential.

— Sean Williams

Source: The Motley Fool