When the closing bell rang on Dec. 31, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite had delivered respective returns of 13%, 23%, and 29% in 2024. The icing on the cake is that all three indexes achieved multiple record-closing highs.
With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, there are probably multiple securities that can help you meet your investment goals. But when push comes to shove, it’s tough to top the long-term outperformance of dividend stocks.
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In The Power of Dividends: Past, Present, and Future, researchers at Hartford Funds, in collaboration with Ned Davis Research, compared the performance of dividend stocks to non-payers over a 50-year period (1973-2023). What they found is that dividend stocks handily outperformed the non-payers based on average annual return — 9.17% vs. 4.27% — and did so while being less volatile than the benchmark S&P 500.
These results shouldn’t come as a surprise. Companies that regularly pay a dividend to their shareholders are almost always profitable on a recurring basis and have proven their ability to navigate challenging economic climates. What’s more, income stocks can often provide transparent long-term growth outlooks, which Wall Street loves.
The challenge with dividend stocks is maximizing income while minimizing risk. Since yields are a function of payout relative to share price, a company with a struggling operating model and declining share price can trap investors with a juicy (but unsustainable) yield. But with proper vetting, companies with ultra-high-yields that are at least four times the yield of the S&P 500 can be found.
What follows are three ultra-high-yield dividend stocks — sporting an average yield of 7.93% — which are historically cheap and nothing short of screaming buys in 2025.
The first high-octane income stock that’s begging to be bought in the new year is none other than Dearborn-based automaker Ford Motor Company(NYSE: F), which is currently yielding just over 6%.
Like most auto stocks, Ford is contending with some challenges. Demand for electric vehicles (EV) has tapered as competition has picked up, leading to sizable losses for the company’s Model e segment. Additionally, a big uptick in warranty-related expenses has dinged Ford’s bottom line.
Despite these potholes, Ford has catalysts working in its favor that may lead to a surprisingly good year for the company.
Perhaps the biggest needle-mover is that its quality control efforts are yielding tangible results. In J.D. Power’s 2024 U.S. Initial Quality Study, released in late June, Ford had the ninth-fewest problems per 100 vehicles out of the 34 brands analyzed. Many of the company’s warranty-related expenses tie into Jim Hackett’s time as CEO. Since Jim Farley took over in October 2020, Ford has notably improved its production process, which should lessen warranty costs sooner, rather than later.
Something else worth noting is that Ford has the ability to pull levers and adjust its spending to boost its margins. In October 2023, Farley and his team announced plans to defer $12 billion in EV spending until demand picked up enough to merit production expansion. Having the flexibility to pull these levers should result in smaller losses for the Model e division in 2025.
Additionally, Ford’s bread-and-butter — truck sales — remains particularly strong. Ford’s F-Series has been the best-selling truck in America for 48 consecutive years, as well as the top-selling vehicle, period, for 43 straight years. Though bigger doesn’t always mean better in the business world, trucks do generate considerably better vehicle margins than small sedans. The success of the F-Series is critical to Ford’s growth.
The icing on the cake is Ford’s jaw-droppingly cheap valuation. Even though auto stocks are highly cyclical and tend to trade at lower forward price-to-earnings (P/E) ratios than most sectors and industries, Ford’s forward P/E of 5.5 is a low-water mark for the decade. It’s also valued at an 11% discount to its book value, which, excluding the COVID-19 crash, marks its cheapest price-to-book ratio since 2006.
Image source: Getty Images.
A second ultra-high-yield dividend stock that’s a screaming bargain in 2025 is business development company (BDC) PennantPark Floating Rate Capital(NYSE: PFLT). PennantPark doles out its dividend on a monthly basis, which currently equates to a mouthwatering 11.25% yield.
BDC’s are a type of business that invests in the equity (common and preferred stock) and/or debt of generally unproven small- and micro-cap companies (known as “middle-market companies”). As of Sept. 30, 88% of PennantPark’s $1.984 billion portfolio was invested in debt securities, which means it’s primarily a debt-driven BDC.
The core advantage of holding loans for middle-market companies is that many lack access to basic financial services, including loans and lines of credit. With limited options available to these unproven businesses, PennantPark is able to generate a yield on its loans that’s well above the market average.
Another competitive edge for the company, which its name may have given away, is that 100% of its roughly $1.75 billion debt portfolio is variable rate. The steepest rate-hiking cycle by the Fed in four decades, which saw the federal funds rate rise by 525 basis points between March 2022 and July 2023, increased PennantPark Floating Rate Capital’s weighted average yield on debt investments by 520 basis points to a peak of 12.6%. Even with the Fed now in a rate-easing cycle, the company’s weighted average yield on debt securities of 11.5% suggests plenty of highly profitable loans are being made.
The company has also done a particularly good job of insulating its portfolio from adverse events, such as loan delinquencies. For instance, all but $2.7 million of its approximately $1.75 billion in loans are first-lien secured notes. First-lien secured debtholders are at the front of the line for repayment in the unlikely event that one of its borrowers seeks bankruptcy. For added context, only 0.4% of PennantPark’s overall portfolio at cost was delinquent on payments, as of Sept. 30, 2024.
Further, its $1.984 billion portfolio, inclusive of equity stakes, is spread across 158 companies. An average investment size of $12.6 million is small enough to not rock the boat if something goes wrong.
Shares of PennantPark can be scooped up right now by opportunistic income seekers for a 4% discount to its book value and a multiple of just 8.7 times forecast earnings for 2025.
The third ultra-high-yield dividend stock that makes for a screaming buy in 2025 is pharmaceutical goliath Pfizer(NYSE: PFE), which is paying out a sustainable 6.5% yield.
Over the last two years, Pfizer’s biggest enemy has been its own success. In 2022, shortly after rolling out COVID-19 vaccine Comirnaty and oral treatment Paxlovid, which is designed to lessen the severity of symptoms in patients with COVID-19, the company recognized more than $56 billion in combined sales from these two therapies. In 2024, Pfizer’s guidance calls for roughly $8.5 billion in combined sales. Seeing more than $48 billion in sales evaporate in two years has been a tough pill to swallow.
But every coin has two sides. Even though sales of Pfizer’s COVID-19 therapies have plunged over the last two years, they were $0 when the decade began. Inclusive of Comirnaty and Paxlovid, Pfizer is pacing $62.5 billion at the midpoint of its full-year sales guidance for 2024. That’s up 49% from the $41.9 billion in sales reported in 2020.
The important thing about Pfizer’s novel-drug portfolio is that, sans COVID-19 therapies, it’s been generating steady organic growth. In particular, the company’s specialty care and oncology segments are growing by double-digits, excluding currency movements, through the first nine months of the year.
Pfizer’s acquisition of cancer-drug developer Seagen for $43 billion in December 2023 serves as another clear-cut catalyst in the new year. Aside from expanding its high-margin oncology pipeline, this deal added over $3 billion in sales and will yield cost savings that fatten the company’s bottom line in 2025.
Additionally, don’t forget that healthcare is a highly defensive sector. No matter how well or poorly the U.S. economy is performing, people will still need medical care and prescription drugs. Since we have no control over when we get sick or what ailment(s) we develop, demand for Pfizer’s novel drugs tends to be consistent from one year to the next.
What makes Pfizer a screaming buy is its exceptionally cheap valuation. The company’s forward P/E of 9 is the lowest it’s been this decade, and its 6.5% yield is approaching an all-time high. It’s the perfect blend of value, income, and stability for investors in 2025.
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Sean Williams has positions in PennantPark Floating Rate Capital. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.
