There are many ways for investors to grow their wealth. They can buy government bonds, a commodity like oil or gold, or buy a house and let it increase in value over time. But compared to other asset classes, stocks have delivered the highest average annual returns over the past century.
One of the best parts about investing your money on Wall Street is that with thousands of stocks and exchange-traded funds (ETFs) to choose from, you can terribly high probability that one or more securities match your risk appetite and investment objectives.
While growth stocks have driven all three major indexes to record highs in 2024, it’s dividend stocks that have far outperformed Wall Street over the past half century.
In 2023, Hartford Funds investment advisors, in partnership with Ned Davis Research, published a comprehensive report on the benefits dividend stocks offer investors. Specifically, researchers compared the performance of dividend-paying companies to that of non-paying companies over the past 50 years (1973-2023).
Based on their findings, dividend stocks averaged an annual return of 9.17% over half a century, and did so while being 6% less volatile than broad-based S&P 500This contrasts with a more modest average annual return of 4.27% for non-payers, which was 18% more volatile than the benchmark index.
The biggest challenge for income seekers is avoiding a yield trap — that is, a company with a broken operating model whose falling stock price has artificially inflated its dividend yield. Fortunately, there are safe, ultra-high-yield dividend stocks Doing to exist.
Below are two dividend stocks with extremely high yields. These are companies with yields at least four times the current yield (1.33%) of the S&P 500. Opportunistic money-seekers can play these with confidence in the second half of 2024.
Real Estate Income: 5.98% Return
The first high-octane dividend stock investors can get into in the second half of the year is a leading retail real estate investment trust (REIT) Real estate income (NYSE: O)Realty Income pays a monthly dividend and has increased its payout for 107 consecutive quarters.
As you can probably tell from Realty Income’s stock chart, it has not participated in the current bull market rally. The reason for its poor performance over the past two years is largely the result of monetary policy changes by the Federal Reserve.
Starting in March 2022, the country’s central bank began its most aggressive rate-hike cycle since the early 1980s. In the process, yields on short-term U.S. Treasuries rose. Instead of buying multiple REITs, investors have opted to generate similar returns by buying Treasuries, which carry almost no risk to the capital invested.
However, this dynamic is unlikely to continue for much longer. While core inflation has remained stubbornly high, the Fed is more likely to cut rates than raise them, as evidenced by the recent movement we’ve seen in Treasury yields. With Realty Income’s yield rising to 6%, this monthly dividend icon is definitely back on the radar.
What makes Realty Income the envy of other retail REITs is its vast, yet exceptionally resilient, portfolio of commercial real estate (CRE). As of the end of March, the company owned nearly 15,500 CRE properties. But here’s the catch: About 90% of its total leases “are resilient to economic downturns and/or insulated from e-commerce pressures,” the company said.
Realty Income’s not-so-subtle secret is that it often leases standalone stores to tried-and-true, brand-name businesses that provide basic necessities and services. For example, grocery stores, convenience stores, dollar stores, hardware stores, drug stores and car rental companies collectively account for 42% of annual contractual rent. Consumers need food, beverages, prescription medications and vehicle maintenance/repairs no matter how well or poorly the U.S. economy is doing.
Additionally, Realty Income has a superior track record relative to other S&P 500 REITs when it comes to tenant occupancy. Since the turn of the century, its median occupancy rate of 98.2% is 400 basis points higher than the median occupancy rate for S&P 500 REITs.
Another positive for current and future investors is that Realty Income has strengthened its existing CRE portfolio and expanded into new channels. For example, the acquisition of Spirit Realty Capital in January 2024 was complementary to its existing CRE portfolio, but also opened doors into new sectors.
Last but not least, Realty Income’s stock is trading at a historically low valuation relative to future cash flow. While stocks have averaged a multiple of 17.3 times cash flow over the past five years, opportunistic income seekers can get into the Realty Income growth story now for 11.8 times forecasted cash flow through 2025.
Pfizer: 6% return
The second ultra-high yielding dividend stock that’s begging to be bought for the second half of 2024 (or even beyond) is pharmaceutical giant Pfizer (NYSE: PFE)While there is no certainty that Pfizer will increase its payout annually, the current yield of 6% is safe.
Pfizer, like Realty Income, has been left in the dust by the current bull market rally. As I have previously stated, Pfizer’s underperformance is a reflection of the fact that it is a victim of its own success.
Pfizer is one of the few pharmaceutical companies that have successfully developed therapies for COVID-19. In 2022, the company’s COVID-19 vaccine (Comirnaty) and oral therapy (Paxlovid) brought in more than $56 billion in combined revenue. This year, combined sales from these blockbuster treatments will total about $8 billion. For those of you keeping score at home, that’s a $48 billion drop in revenue that Wall Street and investors have had to deal with.
But perspective changes everything. While COVID-19 revenues are nowhere near what they once were, Pfizer wasn’t generating a dime in COVID-19 revenues before the pandemic. That estimated $8 billion in 2024 revenue, combined with organic growth from existing product lines and newly launched therapeutics, has pushed annual revenues from $41.9 billion in 2020 to a mid-range estimate of $60 billion this year.
Digging a little deeper, Pfizer’s sales in the quarter ended March, excluding COVID-19 therapies, rose 11% on a constant-currency basis. Continued double-digit operational growth from blockbuster blood-thinning drug Eliquis suggests Pfizer’s overall portfolio is now significantly stronger than it was four years ago.
Another reason for current and potential investors to be excited about the future is Pfizer’s $43 billion acquisition of cancer drug developer Seagen, which closed in December. While the acquisition costs will weigh on Pfizer’s earnings per share (EPS) in 2024, the combination should result in meaningful cost savings and improved EPS in 2025 and beyond. What’s more, this deal vastly expands Pfizer’s oncology pipeline and provides an immediate boost of more than $3 billion in annual sales.
Like Realty Income, Pfizer has macro factors in its corner. Because we have no control over when we get sick or what ailment(s) we develop, demand for everything from prescription drugs to devices remains constant in any economic climate. The point is that Pfizer is highly resilient to economic downturns.
The final piece of the puzzle is that Pfizer stock is cheaper than it has been in a long time. The company’s shares recently hit a decade-low. Furthermore, the stock is valued at about 10 times next-year earnings, which is slightly lower than the average multiple of 11 times next-year earnings per share that Pfizer stock has traded at over the past five years.
Should You Invest $1,000 in Income Real Estate Now?
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer and Realty Income. The Motley Fool has a disclosure policy.
Time to strike: 2 ultra-high-yielding dividend stocks that are begging to be bought in the second half of 2024 (and beyond) was originally published by The Motley Fool
