One of the best aspects of putting your money to work on Wall Street is that there’s no one-size-fits-all strategy. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, investors of all walks and risk tolerances can find securities that match their investing goals.
There are, however, certain strategies that generate higher returns than others. Over the last century, few strategies have been more successful than buying and holding high-quality dividend stocks.
In The Power of Dividends: Past, Present, and Future, the analysts at Hartford Funds examined the many ways income stocks have outperformed non-payers over extended timelines. In particular, Hartford Funds, in collaboration with Ned Davis Research, found that dividend stocks had more than doubled up the average annual return of non-payers (9.17% vs. 4.27%) over the last half-century and did so while being less volatile than non-payers.
But this doesn’t mean all dividend stocks are created equally. For example, ultrahigh-yield dividend stocks — i.e., companies with yields that are four or more times higher than the current yield of the S&P 500 (1.27%) — can sometimes be more trouble than they’re worth. A failing or struggling operating model and a falling share price can “trap” investors seeking a supercharged yield.
Thankfully, not all high-octane income stocks turn out to be trouble. The following three sensational ultrahigh-yield dividend stocks — sporting an average yield of 6.23% — make for no-brainer buys in the fourth quarter and likely well beyond.
Pfizer: 5.81% yield
The first outsized dividend payer that patient investors can scoop up with confidence during Q4 is pharmaceutical kingpin Pfizer (NYSE: PFE).
As I’ve pointed out previously, Pfizer has been a victim of its own success. It’s one of a small number of drug companies to have successfully developed a COVID-19 vaccine (Comirnaty), as well as an oral therapy to reduce the severity of COVID-19 symptoms (Paxlovid). After topping $56 billion in combined sales for these drugs in 2022, Comirnaty and Paxlovid are only expected to generate around $8.5 billion in cumulative sales for Pfizer this year.
But if investors take a step back, they’ll realize just how far Pfizer has come since this decade began. Since delivering $41.9 billion in full-year sales in 2020, Pfizer is pacing $61 billion in revenue for 2024 based on the midpoint of its sales guidance. That’s 46% sales growth in four years, with approximately 45% of this expansion coming from the company’s COVID-19 duo. There’s no question that Pfizer is a stronger company now than it was four years ago.
Pfizer also has inorganic growth to look forward to. In December, it closed a $43 billion deal to acquire cancer drug developer Seagen. Despite this buyout adversely impacting earnings per share (EPS) in 2024, it’s expected to lead to meaningful cost savings and will notably expand Pfizer’s cancer drug pipeline and product portfolio.
The final piece of the puzzle that should have income seekers salivating is Pfizer’s valuation. The company’s forward price-to-earnings (P/E) ratio of 10 is well below the S&P 500’s forward P/E, and it represents a 7% discount to Pfizer’s average forward-year earnings multiple over the trailing-five-year period.
Enterprise Products Partners: 7.21% yield
A second unbreakable dividend stock that income seekers can add with confidence in Q4 is energy juggernaut Enterprise Products Partners (NYSE: EPD). Enterprise has increased its base annual distribution in each of the last 26 years.
Whereas most oil and gas stocks were clobbered by the historic demand cliff that occurred during the early stages of the pandemic, Enterprise Products Partners largely avoided this disruption. It’s not-so-subtle secret is that it’s an energy middleman. Midstream companies like Enterprise are responsible for transporting and storing oil and natural gas, as well as refined product.
Enterprise’s key to success is the nature of its contracts with upstream drilling companies. Specifically, it locks in long-term contracts with drilling companies, many of which are fixed fee. This “fixed-fee” aspect removes the effects of inflation and energy commodity spot-price volatility from the equation. In short, it makes Enterprise’s operating cash flow highly predictable in pretty much any economic climate.
Something else that’s working in Enterprise Products Partners’ favor is the tight global supply for crude oil. Multiple years of capital underinvestment during the COVID-19 pandemic, combined with Russia’s invasion of Ukraine, has created supply uncertainties that have, generally, been positive for the spot price of crude oil. A higher spot price from oil should encourage domestic drilling and provide additional opportunities for the company to secure lucrative, long-term, fixed-fee contracts.
Enterprise Products Partners’ valuation also remains attractive. Shares can be picked up by opportunistic investors for 10 times forward-year earnings, which is a reasonably cheap valuation with earnings per share expected to grow by an annual average of 6.6% through 2028.
Ford Motor Company: 5.68% yield
The third sensational ultrahigh-yield dividend stock that makes for a no-brainer buy in Q4 is automaker Ford Motor Company (NYSE: F). The July tumble in Ford’s stock following the release of its Q2 operating results has sent its yield to almost 5.7%.
Ford’s recent struggles can be traced to industrywide weakness in electric vehicle (EV) sales. Everything from increasing EV competition and price wars to a lack of available infrastructure have ballooned Ford’s Model e (its EV operations) loss estimates to between $5 billion and $5.5 billion this year. EVs were supposed to be a megacatalyst for the auto industry but have predominantly weighed down the operating performance of legacy automakers.
The good news for Ford is that it has the ability to hit the accelerator or pump the brakes, as needed. Despite once-lofty spending expectations on EVs, the company announced plans to postpone $12 billion of its expected EV manufacturing investments last October.
More importantly, Ford’s internal combustion engine (ICE) vehicles are crushing it from an operating standpoint. The company’s F-Series pickup has been the best-selling truck in the U.S. for 47 straight years and the top-selling vehicle (period!) for the last 42 years. Trucks generate substantially juicier margins than smaller sedans, so maintaining momentum for its heavy duty truck line is a big win for the company.
In July, Ford lifted its adjusted free-cash-flow outlook for 2024 by $1 billion to a range of $7.5 billion to $8.5 billion. Strong sales for the company’s F-Series, coupled with abundant opportunities overseas, has Ford’s ICE vehicles firing on all cylinders.
Ford’s historically cheap valuation is the cherry on the sundae that should have income investors shifting into buy mode. Even though auto stocks are highly cyclical and consistently trade at a significant discount to the forward-year earnings multiple of the S&P 500, Ford’s forward P/E of just 5.5 is begging for investors to take notice.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
3 Sensational Ultrahigh-Yield Dividend Stocks That Make for No-Brainer Buys in the 4th Quarter (and Beyond) was originally published by The Motley Fool
