There’s an investment strategy for everyone on Wall Street, regardless of risk tolerance or available funds. One strategy that stands out is buying and holding high-quality dividend stocks over the long term.
A recent report by Hartford Funds (“The Power of Dividends: Past, Present, and Future”), in collaboration with Ned Davis Research, highlighted the exceptional performance of income stocks over the past half-century. According to the report, dividend-paying stocks generated an average annual return of 9.18% over 50 years, more than doubling the return of non-payers at 3.95%.
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But the challenge for income seekers lies in weighing the risks associated with high-yield dividend stocks. Generally, the higher the yield, the greater the inherent risk for investors — although this is not always the case.
If you desire $300 in exceptionally safe annual dividend income, you can achieve it by investing $4,975 (split equally) into the following three high-yield stocks, averaging a 6.05% yield.
Realty Income: 5.85% Yield
Consider retail real estate investment trust (REIT) Realty Income (NYSE: O) as the first pick for generating reliable annual income. Realty Income has increased its payouts 123 times since going public and distributes dividends on a monthly basis.
REITs have faced headwinds due to the Federal Reserve’s hawkish monetary policy, leading to a faster rate-hiking cycle and soaring Treasury bond yields. Despite this, Realty Income has stood out among retail REITs due to the resilience of its renters, who primarily operate in recession-resistant industries such as grocery, convenience, dollar, drug, and home improvement stores. These industries account for almost 41% of the company’s annualized contractual rent.
Moreover, Realty Income has diversified its extensive commercial real estate (CRE) portfolio by expanding into new industries, notably closing an acquisition of Spirit Realty Capital and making deals in the gaming space. Adding to its appeal, the company’s shares are currently trading at a 38% discount to its average cash flow multiple over the past five years.
Philip Morris International: 5.78% Yield
Next up is tobacco company Philip Morris International (NYSE: PM), offering a 5.78% yield. Despite declining cigarette shipments, Philip Morris holds a strong position in the industry, driven by its exceptional pricing power, global reach, and growth in smokeless tobacco products, particularly its Iqos system capturing over 9% of the global heated tobacco market.
In addition, Philip Morris’ forward-year earnings multiple of 12.7 reflects a 17% discount, enhancing its attractiveness as a high-yield investment option.
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AT&T: 6.52% Yield
Finally, telecom leader AT&T (NYSE: T) offers a high-water mark of 6.52% in yield. While the legacy telecom industry faced challenges related to environmental and health liabilities and rising interest rates, AT&T remains a top choice for reliable annual income.
AT&T’s Thriving Business Offers Investment Promise Despite Short-Term Worries
Upon closer inspection, the recent WSJ report may seem like much ado about nothing in the grand scheme of things. AT&T has reassured that lead-sheathed cables constitute only a small fraction of its network and previous tests found no health-related issues. Plus, any potential financial liability is likely to be resolved through the protracted U.S. court system.
Stellar Operating Performance
However, investors would do well to shift their focus to AT&T’s consistently improving operating performance. The company’s efforts to upgrade its network for 5G speeds have spurred greater data consumption among wireless users. Notably, full-year mobility service revenue saw a robust 4.4% increase, with the wireless segment achieving its highest-ever operating income.
Equally remarkable is AT&T’s success in expanding its broadband operations. The addition of 1.1 million net subscribers in 2023 marked the sixth consecutive year of adding over 1 million net subscribers. Broadband presents an accessible avenue for AT&T to promote high-margin service bundling, fostering customer loyalty to its suite of products and services.
Fortified Balance Sheet
Furthermore, AT&T has significantly bolstered its balance sheet. Since the close of March 2022, the company has reduced its net debt by approximately $40 billion to $128.9 billion. The organic reduction of debt and the divestment of its content division, WarnerMedia, have substantially enhanced the company’s financial flexibility.
Favorable Valuation
As a final point, income investors can take heart in the attractive valuation of AT&T. The company’s forward P/E ratio of 7.4 presents a highly favorable risk-reward profile for both current and prospective shareholders.
Before investing in Realty Income, it’s essential to consider the following:
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Sean Williams holds positions in AT&T. The Motley Fool holds positions in and recommends Realty Income. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
The opinions expressed in this article reflect those of the author and do not necessarily represent the views of Nasdaq, Inc.
