Ultra-high-yield dividend stocks, or companies with annualized payouts above the 5% mark, tend to underperform the broader markets over periods of less than five years. The core reason is that an elevated yield often indicates a company is facing a major headwind.
Tobacco giant Altria (NYSE: MO) and telecom behemoth AT&T (NYSE: T) have defied this trend in 2024. Despite their exceptional yields (see below), both stocks are on pace to keep up with the red-hot S&P 500 and perhaps surpass its performance before year’s end.
Can these former laggards really outperform the S&P 500 in 2024? Let’s dig deeper to find out.
Altria: A proven value creator
Altria, the maker of Marlboro cigarettes, has been an unusually strong performer this year. Despite this ongoing secular decline in cigarette smoking, Altria’s stock has delivered a total return (including dividends) of 19.3% this year, compared to the 16% total return of the S&P 500.
While this outperformance is likely due to a broadening of the overall bull market and not a company-specific phenomenon, Altria still represents a compelling investment case. Speaking to this point, it pays a ginormous 8.51% annualized yield and trades at a mere 9 times forward earnings. For context, the S&P 500 trades at 22.6 times forward earnings at the time of this writing.
Now, the tobacco giant does have a fairly high payout ratio of 81%, but its 54-year track record of consecutive dividend increases implies a reduction is highly unlikely in the short term. Altria is also enjoying a fairly strong launch of its new e-cigarette brand, NJOY, which should help offset declines in its core tobacco business.
What does Wall Street think? Based on analysts’ consensus 12-month price target, the stock’s implied upside potential comes in at 3.3%. That’s not high-growth territory, to be sure, but it may be enough to outpace the S&P 500 over the balance of 2024 (see more later).
AT&T: An undervalued telecom
AT&T is entering a new era. With its media misadventure in the rearview mirror and the U.S. telecom industry coming to a pricing equilibrium, investors have started to bid up the company’s shares after a multiyear down period.
To wit, AT&T’s stock has so far delivered a total return of 15.8% this year, essentially deadlocked with the S&P 500 in terms of performance this year.
Why might its stock keep churning higher? AT&T pays a rather generous 5.9% yield, and its payout ratio of 59.6% implies that dividend payouts are comfortably covered by earnings. What’s more, AT&T stock is attractively priced at a mere 8.45 times forward earnings.
Although AT&T isn’t a growth machine, it does sport a nationwide 5G wireless network with deep spectrum and a fiber network covering nearly a quarter of the country. Wall Street thinks the telecom company’s entrenched competitive position, exceptional yield, and attractive valuation should act in concert to drive another 6.5% gain over the next 12 months.
Verdict
The S&P 500 is trading at a premium valuation relative to historical norms. What’s more, the benchmark index is heavily reliant on Nvidia at the moment. While its long-term outlook remains incredible, Nvidia might struggle in the near term due to its lofty valuation.
In that event, Altria and AT&T may indeed end up outperforming the S&P 500 this year. After all, these two blue chip dividend stocks come with a built-in margin of safety, thanks to their mouthwatering yields and compelling valuations.
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George Budwell has positions in AT&T. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Can These 2 Ultra-High-Yield Dividend Stocks Outperform the S&P 500 in 2024? was originally published by The Motley Fool
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