Dividends are a great investment strategy for retirees or anyone else looking for passive income that can pay their bills.
But be careful: Chasing sky-high dividend yields is one of the classic mistakes investors often make. Higher yields mean more income for your money, but really high yields are usually a warning sign of trouble within a company. Remember, a dividend is only good if the company can pay it.
Fortunately, some excellent ultra-yield stocks buck this rule. Here are three examples with yields ranging from almost 6% to over 8%. More importantly, you can count on the dividends to keep coming.
1. This tobacco giant offers an 8.5% dividend yield you can count on
You wouldn't think so, but Altria(NYSE: MO) has remained a stout dividend stock despite smoking rates declining for decades. The company sells nicotine and tobacco products in the United States, including Marlboro cigarettes, Copenhagen chewing tobacco, and Black & Mild cigars. Altria sells fewer units each year, but raises its prices enough to offset volume declines and grow its profits. That formula is the secret behind more than five decades of dividend growth, making Altria a Dividend King.
Investors shouldn't have to worry about the dividend drying up anytime soon. Altria's dividend payout ratio is comfortable at 76% of its estimated 2024 earnings. Altria can afford a higher payout ratio since its tobacco business requires little investment. Management has raised the dividend by an average of 5% annually for the past five years, so investors get solid growth on top of such a high yield, too.
Eventually, cigarette volumes could decline to the point that it becomes a problem. Altria is steadily working to shift its business to new categories. It is growing sales of smokeless products like electronic vaping devices and oral nicotine pouches. Additionally, the company has a multibillion-dollar stake in Anheuser-Busch that it can sell for additional cash if needed. It looks like Altria's dividend has years of runway ahead.
2. A blue chip real estate stock yielding 5.9% today
Owning real estate is arguably the world's oldest business. Today, investors can add real estate to their portfolio with real estate investment trusts (REITs), publicly traded companies that acquire and lease property.
Realty Income(NYSE: O) is one of the best REITs out there. The company specializes in retail properties, often renting to recession-proof tenants like grocery stores, drugstores, and convenience stores. The company uses net leases, which reduces risk to Realty Income by placing expenses like maintenance, insurance, and taxes on the tenant.
Realty Income and other REITs faced some of the harshest conditions imaginable during the Great Recession and COVID-19 pandemic. However, Realty Income maintained its dividend and raised it through the hard times. The company has raised its dividend for 31 consecutive years. Today, the dividend payout ratio is approximately 75% of its estimated 2024 profits.
High interest rates have pressured Realty Income's growth, and the resulting share price decline has pushed the dividend yield to nearly 6%. That uncommonly high yield shouldn't set off alarm bells because the dividend is rock-solid. Instead, use the opportunity to lock in a generous income stream that investors can expect to keep growing. Unlike many companies, Realty Income pays a monthly dividend, a bonus for those seeking steady income.
3. Dial up a 5.9% yield with this wireless carrier
U.S. telecommunications giant AT&T(NYSE: T) wouldn't have made this list a few years ago, but times have changed. AT&T is America's largest wireless network in an industry that only a few companies dominate.
Rather than ride that train, AT&T got a little carried away and spent the past decade borrowing to fund expensive mergers to build a media business. It ultimately failed, and AT&T sold off its media assets. Unfortunately, the mergers left AT&T with too much debt, and the company cut its dividend in 2022.
The good news is that's in the past. AT&T's dividend payout ratio is only between 45% to 50% of its expected free cash flow this year. The dividend cut successfully freed up more cash for AT&T to pay down debt, and the balance sheet is getting healthier by the quarter. Investors shouldn't need to worry about another dividend cut; AT&T's business is recession-proof because people almost always pay their phone bills these days.
AT&T made a hard decision to cut its dividend, and now investors are better off for it. The company is back to doing what it does best, and it's showing. AT&T's wireless and broadband businesses are thriving. A healthier AT&T is poised to pay generous dividends well into the future.
Should you invest $1,000 in Altria Group right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
