It's been a wild past four years on Wall Street, with all three broad-market indexes vacillating between bear and bull markets in successive years. Even though patience pays off handsomely, periods of heightened volatility are known to encourage investors to seek out stocks that are perceived as "safe."
Historically speaking, few investment categories have delivered better returns for long-term-minded investors than dividend stocks.
Companies that offer a regular dividend tend to check all the appropriate boxes, including recurring profits and the ability to offer transparent long-term growth outlooks. But more importantly, over long periods, dividend stocks have handily outperformed companies that don't offer a payout.
Based on a December 2022 study from Ned Davis Research and the Hartford Funds, companies that initiated and grew their payouts between 1973 and 2022 delivered annualized returns of 10.24% and were 12% less volatile than the benchmark S&P 500. By comparison, non-paying companies produced a far less impressive 3.95% annualized return, along with 18% higher volatility than the broad-based S&P 500 over the same span.
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In other words, it's not a question of if dividend stocks should be part of investors' portfolios, but rather which income stocks are the best. Thankfully, careful vetting can uncover some true gems with rock-solid payouts.
If you want to generate $500 in super-safe annual dividend income in 2024, simply invest $4,850 split equally into the following three ultra-high-yield stocks -- i.e., companies with yields that are 4 or more times higher than what the S&P 500 offers. Together, they sport an average yield of 10.33%!
Altria Group: 9.71% yield
The first exceptionally safe ultra-high-yield stock that can help you bring home $500 in 2024 is none other than leading domestic tobacco company Altria Group (MO 0.56%). Altria has raised its base annual payout 58 times over the past 54 years, which places it among an elite group of income stocks known as Dividend Kings.
The biggest challenge for tobacco companies is that the percentage of adults smoking cigarettes has been declining for decades. Between the mid-1960s and 2021, the Centers for Disease Control and Prevention found that the U.S. adult cigarette smoking rate fell from around 42% to just 11.5%. With consumers becoming more aware of the potential dangers of long-term tobacco use, the pool of smokers has shrunk.
Normally, a steadily declining user base would be a major red flag. But this isn't the case for Altria.
To start with, Altria possesses exceptionally strong pricing power. Tobacco products contain nicotine, which is an addictive chemical. Users' desire for nicotine has allowed Altria to raise prices on its products without chasing away its remaining customers. It also doesn't hurt that premium brand Marlboro held a greater-than-42% share of the cigarette market as of Sept. 30. Having such a dominant position makes it even easier for the company to offset lower cigarette shipments with price hikes.
Additionally, Altria Group is expanding its operations beyond smokable products. At the beginning of June, it closed a $2.75 billion acquisition of electronic-vapor company NJOY Holdings. Following a sizable loss from its equity investment in e-vapor company Juul, Altria made sure to do its homework before pulling the trigger on the NJOY buyout.
NJOY has received six marketing granted orders (MGOs) from the Food and Drug Administration. An MGO is effectively a green light for vape products and devices to be marketed by retailers. The lion's share of vape products on retail shelves today don't have MGOs, and thus risk being pulled at some point in the future. Altria won't have to worry about this with NJOY's products.
Altria's valuation also makes a lot of sense. Although it isn't the growth story it once was, a combination of price hikes, operating diversity, and ongoing share repurchases should allow Altria's earnings per share (EPS) to grow by low-to-mid single digits over the next five years. With shares trading at only 8 times forward earnings, this represents quite the bargain.
Alliance Resource Partners: 14.13% yield
A second ultra-high-yield stock that can produce $500 in super-safe dividend income in 2024 from an initial investment of $4,850 (split three ways) is coal stock Alliance Resource Partners (ARLP 0.51%). Alliance Resource's 14% yield isn't a typo. The company is doling out a $0.70-per-share distribution each quarter.
Coming into this decade, there may not have been a more universally disliked industry on Wall Street than coal stocks. Companies like Alliance Resource Partners were expected to become extinct over time as renewable energy solutions, including wind and solar power, became low-cost alternatives. However, the COVID-19 pandemic changed everything.
For more than three years during the pandemic, global energy companies had to reduce their capital spending. Although much of the demand uncertainty that accompanied the worst of the pandemic has abated, crude oil supply is likely to be constrained for years to come. With global energy demand increasing, it's coal stocks that have stepped up to the plate. Alliance Resource Partners has enjoyed a big-time increase in the per-ton sales price for coal.
But there's more to this story than just higher prices for the company's underlying commodity. Credit needs to be given to Alliance Resource's management team for successfully steering the ship through a challenging climate. The company's leadership has often slow-walked production expansion to avoid being buried by debt. The result is a very manageable $162.6 million in net debt for a company that generated nearly $1 billion in operating cash flow over the trailing 12 months.
Furthermore, Alliance Resource Partners books production up to four years out. With the per-ton price of coal well above its historic average, committing and pricing future deals ensures steady cash flow.
Alliance Resource Partners has also diversified its operations beyond coal. It's acquired royalty interests in oil and natural gas. Should energy commodities remain constrained, higher spot prices for oil and natural gas will benefit Alliance Resource's bottom line.
Image source: Getty Images.
Antero Midstream: 7.14% yield
The third ultra-high-yield stock that's capable of generating $500 in super safe dividend income in 2024 from a beginning investment of $4,850 (split three ways) is natural gas specialist Antero Midstream (AM 0.18%).
Considering what I noted above about capital underinvestment for energy companies over the previous three-plus years, it wouldn't be surprising if energy stocks are simply unpalatable for some investors. But the good news here is that Antero Midstream largely avoided the operating turbulence that hit energy stocks during the pandemic.
The not-so-subtle "secret" to Antero's stability is that it's a midstream provider (in case its name didn't give it away). It's essentially an energy middleman that provides gathering, processing, and water handling services for natural gas drilling companies. Most of its contracts are with its parent company, Antero Resources (AR 0.36%).
The beauty of Antero Midstream's operating model is that its contracts are long-term in nature and entirely fixed fee. Fixed-fee contracts remove the effects of inflation and spot-price volatility from the equation. Regardless of how uncertain the near-term outlook may be for the energy industry or U.S. economy, Antero Midstream tends to generate highly predictable cash flow.
Looking ahead, Antero Midstream has two clear-cut catalysts working in its favor. First, parent Antero Resources plans to increase drilling on Antero Midstream-owned acreage. Higher natural gas recovery should incrementally increase Antero Midstream's free cash flow over time.
On the other hand, the company is enjoying a multiyear period of lower capital expenditures. With a number of big projects now in the rearview mirror, it'll be able to focus on reducing its debt and improving its financial flexibility.
Antero Midstream is also benefiting from bolt-on acquisitions. Though investors much prefer the organic expansion of free cash flow, earnings-accretive acquisitions that put the company in a better position to reduce its leverage are welcomed.
With reduced capital expenditures, Antero Midstream can sustain a low-double-digit earnings growth rate over the next five years.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
