2 Ultra-High-Yield Dividend Stocks That Are No-Brainer Buys in February

Yahoo

04-02-2025

For more than a century, the stock market has stood tall over all other asset classes. While buying and holding bonds, gold, oil, or real estate, would have increased your wealth, no asset class has come close to rivaling the average annual return of stocks over extended periods.
Though there's no shortage of ways to make money on Wall Street, one time-tested strategy that's difficult to beat is purchasing and holding high-quality dividend stocks.
Companies that pay a regular dividend to their shareholders are typically profitable on a recurring basis and capable of providing transparent long-term growth outlooks. Perhaps most important, dividend stocks have almost always proven to investors that they can successfully navigate periods of economic turbulence.
Another great aspect of income stocks is their unmistakable outperformance of non-payers. In The Power of Dividends: Past, Present, and Future, the analysts at Hartford Funds, in collaboration with Ned Davis Research, compared the performance of dividend stocks to non-payers spanning a half-century (1973-2023). What their research showed was that dividend stocks more than doubled the average annual return of public companies that didn't offer a dividend: 9.17% vs. 4.27%.
Ideally, investors want to receive the maximum yield possible with the least amount of risk. But studies have found that risk and dividend yield tend to go hand in hand. In other words, ultra-high-yield stocks -- i.e., those with yields four or more times greater than the yield of the S&P 500 -- can sometimes be more trouble than they're worth. But this isn't always the case
With proper vetting, amazing deals can be uncovered for companies sporting ultra-high yields. What follows are two ultra-high-yield dividend stocks -- sporting an average yield of 6.15% -- which make for no-brainer buys in February.
The first magnificent dividend stock investors can confidently add to their portfolios for the shortest month of the year (and beyond) is pharmaceutical behemoth Pfizer (NYSE: PFE). Pfizer's somewhat steadily growing payout and its declining share price (of late) have pushed its yield to 6.5%, which is a stone's throw from an all-time high.
Although the 51% decline in Pfizer's stock over the trailing-three-year period would appear to signal issues with the company's operating model, the reality is that the company has been a victim of its own success.
During the COVID-19 pandemic, Pfizer was one of a small number of drugmakers to successfully develop a vaccine (Comirnaty). It also created Paxlovid, which is an oral regimen used by patients to keep them from developing a severe case of the disease. In 2022, Comirnaty and Paxlovid collectively generated more than $56 billion in sales for Pfizer. In 2024, this combo was estimated to generate $10.5 billion in revenue.
While it's true that Pfizer's core COVID-19 therapies will see sales decline by more than $45 billion in two years, let's also note the company had $0 in COVID-19 drug sales when this decade began. In fact, the midpoint of Pfizer's 2024 sales guidance ($62.5 billion) is 49% higher than the $41.9 billion in net sales reported in 2020. For all intents and purposes, its brand-name drug portfolio has significantly strengthened over the last four years.
Excluding Pfizer's COVID-19 therapies, operating sales (sans currency changes) grew by 14% in the September-ended quarter. Through the first nine months of 2024, operating sales growth in oncology and specialty care rose by 26% and 12%, respectively.
One of the more exciting catalysts for Pfizer -- and a key reason oncology revenue has surged by an aforementioned 26% -- is its $43 billion acquisition of cancer-drug developer Seagen, which closed in December 2023. Aside from substantial long-term cost-savings, this deal vastly expands Pfizer's oncology pipeline and should be notably accretive to its earnings per share beginning this year.
Pfizer also gets the benefit of being in a highly defensive sector. Regardless of how well or poorly the U.S. and global economy are performing, people will still become ill and require prescription medicines. This leads to steady demand for its therapies and relatively predictable operating cash flow.
The icing on the cake for investors is Pfizer's historically cheap valuation. Its forward price-to-earnings (P/E) ratio of 9 represents a 15% discount to its average forward-year earnings multiple over the last five years.
The second ultra-high-yield dividend stock that makes for a no-brainer buy in February is Wall Street's leading retail real estate investment trust (REIT), Realty Income (NYSE: O). Since its initial public offering in 1994, Realty Income has increased its dividend 128 times, including for 109 consecutive quarters. Best of all, it doles out its payment on a monthly basis.
Similar to Pfizer, Realty Income's stock has struggled amid a historic bull market. Shares of the premier retail REIT have fallen by 21% over the trailing-three-year span.
Whereas Pfizer was a victim of its own success, Realty Income's subpar performance can be traced to monetary policy shifts by the Federal Reserve. Investors seek out REITs because of their juicy yields and generally low volatility. But when the nation's central bank kicked off an aggressive rate-hiking cycle in March 2022, it sent short-term Treasury yields soaring. With Treasury bill yields approaching Realty Income's dividend yield, investors chose bonds instead.
The good news is that the nation's central bank has, once again, altered its monetary policy stance and is in the midst of a rate-easing cycle. Over time, this should allow ultra-high-yielding REITs, like Realty Income, to stand out.
But there's more to this story than just the expectation of declining interest rates. For instance, Realty Income's commercial real estate (CRE) portfolio is well-protected from short-lived recessions and e-commerce pressures. By leasing to brand-name, stand-alone businesses that provide basic need goods and services (e.g., grocery stores, dollar stores, and drug stores), Realty Income ensures that its lessee's pay their rent and renew their leases.
To build on this point, Realty Income's proven vetting process and lengthy lease terms have led to occupancy rates that are well above the industry average. Whereas S&P 500 REITs have enjoyed a median occupancy rate of 94.2% since the start of the 21st century, Realty Income's median occupancy rate is 400 basis points higher (98.2%) since the beginning of 2000. A higher occupancy rate leads to steadier (and predictable) funds from operation.
Management is also doing a phenomenal job of moving the company into new verticals. Realty Income's January 2024 purchase of Spirit Realty Capital, along with two leasing deals orchestrated in the gaming industry, point to ongoing diversification efforts.
The final reason Realty Income is a no-brainer buy is its attractive valuation. Based on Wall Street's consensus, shares of the company are valued at roughly 12.4 times forecast cash flow in 2025, which equates to a 26% discount to its average multiple to cash flow over the trailing-five-year period.
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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.
2 Ultra-High-Yield Dividend Stocks That Are No-Brainer Buys in February was originally published by The Motley Fool