In less than two weeks, Wall Street and investors will be welcoming in a new year. Although 2023 has been a banner year for equities, highlighted by the outperformance of the high-growth "Magnificent Seven," it's dividend stocks that should be on investors' radar as we prepare to open the curtain on 2024.
Publicly traded companies that offer a regular dividend to their shareholders are almost always profitable on a recurring basis and time-tested. What's more, income stocks have left non-payers eating their dust. Between 1972 and 2012, companies initiating and growing their payouts generated an annualized return of 9.5%. That compares to a meager 1.6% annualized return for public companies that didn't offer a dividend between 1972 and 2012.
However, not all dividend stocks are cut from the same cloth. As we get ready to move into the new year, five exceptionally safe high-yield dividend stocks (those with yields of at least 4%) stand out as top buys.
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Verizon Communications: 7.12% yield
The first extremely safe high-yield dividend stock that's begging to be bought in 2024 is telecom company Verizon Communications (VZ -0.05%).
Although Verizon's high-growth days are long gone, upgrading its network to handle 5G download speeds is providing a healthy and sustainable lift to its bottom line. The company's wireless division generates its juiciest margins from data -- and data consumption should continue to climb as consumers upgrade their wireless devices.
Additionally, Verizon is beginning to see the payoff from its aggressive spending on mid-band spectrum. Having the ability to offer at-home 5G broadband has helped Verizon secure more than 400,000 net broadband additions in each of the past four quarters. Broadband might not be the growth driver it once was, but it's the perfect tool to encourage its customers to bundle their services. Bundling tends to lead to higher margins and better customer retention.
Investors would also be wise to look past the mostly unwarranted concerns regarding lead-clad cables that were raised in a July report by The Wall Street Journal. Verizon has noted that lead-sheathed cables account for a small percentage of its current network. Further, any future liability would be established by the U.S. courts, which could take many years to work its way through.
Valued at roughly 8 times forward-year earnings, there appears to be a solid floor and reasonable upside for Verizon stock.
Realty Income: 5.37% yield
A second super safe high-yield dividend stock that's ripe for the picking as we get ready to turn the page to 2024 is retail real estate investment trust (REIT) Realty Income (O 1.28%). Realty Income pays its dividend monthly and has increased its payout in each of the past 104 quarters.
While the prospect of a recession in 2024 has some investors concerned, Realty Income's more than 13,000-unit commercial real estate (CRE) portfolio is built to thrive in virtually any economic climate. Over 90% of Realty Income's total rent is resilient to economic downturns.
More specifically, over a third of the company's annualized contractual rent originates from grocery stores, convenience stores, dollar stores, and drugstores. These are businesses that provide basic-need goods and services and will therefore draw in customers, no matter how well or poorly the U.S. economy performs.
We've also begun to see Realty Income diversify its CRE portfolio. The company has made two gaming industry transactions in less than two years, and is in the process of acquiring Spirit Realty Capital in a deal valued at $9.3 billion. The latter is a complementary deal that'll help Realty Income diversify into new industries and become even more resilient to economic downturns.
Realty Income is valued at 13 times consensus cash flow for 2024, which represents its lowest multiple to cash flow in more than a decade.
Pfizer: 6.31% yield
The third safe high-yield dividend stock that makes for a genius buy in 2024 is pharmaceutical company Pfizer (PFE 1.60%). Except for a very short period during the Great Recession, Pfizer's existing yield of 6.3% has never been higher.
The knock against Pfizer is that its massive bump in sales from COVID-19 vaccines has largely been backed out of its revenue and profit forecasts moving forward. Now that the worst of the pandemic is in the rearview mirror, attention has turned to Pfizer's other drugs and its expansive pipeline. With Pfizer's 2024 guidance failing to impress, shares fell to a 10-year low.
Though Pfizer anticipates a $0.40-per-share hit to its earnings in the new year due to its now-completed $43 billion acquisition of cancer drug developer Seagen, it's important to recognize that this isn't a recurring loss or expense for the company. The combination of these two businesses will eventually result in recurring cost savings, as well as add billions of dollars in annual revenue for Pfizer.
Equally important is the fact that Pfizer's non-COVID therapeutics are still growing. Sales for non-COVID products jumped 10% during the third quarter, with Pfizer's Special Care segment leading the way. If the company's COVID-19 sales bump hadn't occurred, it's unlikely we'd see such an overreaction to sales and profits returning to their normal (i.e., modest) upward trajectory.
At less than 3 times forecast sales in 2023 and 2024, Pfizer looks to be quite the bargain for patient income seekers.
PennantPark Floating Rate Capital: 10.54% yield
Safe high-yield dividend stocks can be found in the small-cap arena, too! Business development company (BDC) PennantPark Floating Rate Capital (PFLT -0.61%), which also pays its dividend on a monthly basis, is a rock-solid income stock to buy for 2024.
BDCs are businesses that invest in the debt and/or equity of middle-market companies. By "middle market," I mean generally unproven micro-cap and small-cap businesses. In PennantPark's case, a sizable percentage of its portfolio is tied up in debt securities.
The clear advantage of this debt-focused approach can be seen in the yield PennantPark generates. Since most small businesses are unproven, their access to traditional debt and credit markets may be limited or closed off entirely. As a result, financing deals are often secured at lending rates that are well above average. As of Sept. 30, PennantPark's weighted average yield on debt investments was a cool 12.6%!
The key to PennantPark's success -- in case the company's full name didn't already give it away -- is that 100% of its $906.3 million debt-securities portfolio sports variable rates. The Federal Reserve just undertook its most aggressive rate-hiking cycle in four decades. These cumulative rate hikes since March 2022 have increased PennantPark's weighted average yield on debt investments by 520 basis points.
Furthermore, PennantPark's management team has done a truly phenomenal job of protecting the company's invested assets. The average investment size spanning 131 companies is just $8.1 million, and 99.99% of the company's debt securities are first-lien secured. First-lien secured debt holders are at the front of the line for repayment in the event that a borrower seeks bankruptcy protection.
Altria Group: 9.39% yield
The last of the safest high-yield dividend stocks to buy for 2024 is none other than tobacco juggernaut Altria Group (MO 0.77%). Altria has raised its payout 58 times over the past 54 years, which makes it a true Dividend King.
The clear problem for Altria and its peers is that consumers have wised up about the potential dangers of long-term tobacco use. Since the mid-1960s, adult cigarette smoking rates in the U.S. have fallen from around 42% to just 11.5%, as of 2021. A shrinking pool of potential customers has led to modest declines in aggregate cigarette shipments for Altria.
However, Altria Group has exceptional pricing power in its corner. Tobacco products contain nicotine, an addictive chemical. The strong desire to continue using tobacco products has allowed Altria to pass along price hikes that often outweigh any decline in cigarette shipments. It also doesn't hurt that premium brand Marlboro accounts for more than 42% of retail cigarette share, which makes raising prices relatively easy.
Altria Group is also looking beyond its traditional tobacco lines and shifting its sales toward smokeless products. For instance, it completed the acquisition of electronic-vapor company NJOY Holdings for $2.75 billion in early June. NJOY has received a half-dozen marketing granted orders (MGOs) from the U.S. Food and Drug Administration for its products and devices. These MGOs grant NJOY the right to keep its items on retail shelves. The vast majority of e-vapor companies lack MGOs.
Similar to Verizon, Altria Group's forward-year price-to-earnings ratio of 8 provides a safe floor, with plenty of upside for long-term, income-seeking investors.
Sean Williams has positions in PennantPark Floating Rate Capital. The Motley Fool has positions in and recommends Pfizer and Realty Income. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
