Although Wall Street has many paths to profits, one of the best, with nearly a 100-year track record, is investing in dividend stocks. Particularly in periods of high inflation and slowing economic growth, one constant investors can count on is the reliability of dividend stocks to see them through.
That’s why I like investing in dividend stocks. I enjoy the stability they provide my portfolio and the income stream they give to my total return.
The asset managers at Hartford Funds looked at the performance of the benchmark S&P 500 going back to 1930. They found that dividends contributed 41% to the index’s total return over that nine-decade period. More recently, J.P. Morgan Asset Management found that stocks that initiated and then raised their payouts over the 40 years between 1972 and 2012 returned an average of 9.5% annually versus just 1.6% for non-dividend-paying stocks.
But avoid chasing yield. Stocks that pay the highest yields tend not to perform as well as high-yield dividend stocks. Further, companies that initiated a dividend and then increased the payout over time performed better than steady-state dividend stocks. It’s why you’ll find my portfolio is chock-full of Dividend Aristocrats and Dividend Kings, businesses that have raised their payouts for 25 to 50 years or more, respectively.
Below are the three highest-yielding stocks in my portfolio. Read on to find out if they are right for you!
AT&T (T)
AT&T (NYSE:T) may have been the original “widows-and-orphans” stock. Its dominant presence in the telecom industry and the reliability of its rising dividend made it a staple of portfolios for decades. With the breakup of Ma Bell and the advent of competition, AT&T’s dominance is no more, but it’s still a defensive stock worth owning.
The telecom giant isn’t the growth stock it once was, as it’s laden with $138 billion worth of debt even after spinning off its WarnerMedia business. However, it offers consistent cash flows on a much-improved financial situation. AT&T generated $5.2 billion in free cash flow (FCF) in the third quarter, produced $10.4 billion year-to-date, and is expected to make $16.5 billion for the full year. The stock is down 10% in 2023, which helped push its dividend yield up to 6.7%. Early on, there were questions about whether the payout was sustainable, but AT&T showed it could continue supporting the dividend.
While the stock might grow slowly, it’s definitely not growth. The continued rollout of 5G networks provides a serious inflection point for the business. It will be the first substantial telecom industry infrastructure upgrade in a decade. Depending upon who’s counting, 5G will represent between 70% and 95% of the mobile market by 2030. As greater mobile connectivity increases, AT&T’s profitability should follow. The telecom generates some of its highest profit margins from data usage.
AT&T stock is deeply discounted, trading at some of its lowest levels in decades. At six times earnings estimates, a fraction of sales, and 7x FCF, this telecom stock should ring up serious growth in the years ahead.
Leggett & Platt (LEG)
Mattress spring maker Leggett & Platt (NYSE:LEG) checked off many boxes for me when I bought it. Along with being the industry leader and being in business for 140 years, it’s the sort of company famed investor Peter Lynch would like. It’s an unassuming, under-the-radar stock that most people use, even if they don’t realize it.
Over the past 50 years, Leggett & Platt’s stock returned well over 4,300%. It’s not too shabby, but the picture dramatically changes when you add in its dividend, which currently yields 6.8% annually. The innerspring coil maker’s total return is 14,360%. Had I been smart enough (and old enough) to invest $10,000 in the stock in 1970, it would be worth $1.45 million today. The power of reinvesting dividends, compounding, and time would have easily made me a millionaire.
It wasn’t a smooth ride higher, though. Leggett & Platt’s total return stood at $2.8 million in 2021, so it has been cut in half in just two years. That’s due to the inflation and interest rate hikes that ran rampant in the pandemic’s wake. Only now is it starting to claw its way higher again.
While bedding is the lion’s share of its revenue, Leggett & Platt also has a hand in the automotive, aerospace, and flooring industries. I’m confident it will bounce back going forward. With it trading at a fraction of its sales and less than 8x FCF, it’s a cheap stock worth looking at.
Altria (MO)
The highest-yielding stock in my portfolio is tobacco behemoth Altria (NYSE:MO). Its dividend yields a whopping 9.5% annually as the stock fell 11% this year. Although cigarettes tend to be a recession-resistant business, it’s not bulletproof. Rampant inflation walloped consumers’ discretionary spending such that even smokers cut back. Tobacco is already in a secular decline, but shipments of Altria’s flagship brand, Marlboro, fell 10.5% last quarter compared to a year ago.
Marlboro is far and away the dominant cigarette brand in the U.S., with a 42.3% market share. It also holds a 58.9% share of the premium cigarette market. But smokers are switching to cheaper, budget brands to compensate for the hit to their wallets.
Yet the industry understands it needs to change, and Altria is investing heavily in smoke-free products. It recently acquired the third-largest vaping brand, NJOY, and its leading one! The brand of nicotine pouches is enjoying significant growth. Shipments were up 37% in the third quarter.
Despite the headwinds, Altria remains hugely profitable. Operating income only slipped 1.7% in the period to $2.7 billion. That could rise next year as it doubles the number of stores to 70,000 where the NJOY electronic cigarette is sold. NJOY is small now but could steal market share from its rivals with Altria’s marketing muscle behind it.
It’s another cheap stock and not for everyone. However, With patience, Altria can lead the way in reduced-risk products and creating shareholder value.
On the date of publication, Rich Duprey held a LONG position in T, LEG, and MO stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
