Ultra-high-yield dividend stocks, or companies with annualized payouts above the 5% mark, tend to underperform broader markets over periods of less than five years. The main reason is that a high yield often indicates that a company is facing a major obstacle.
tobacco giant Altria (NYSE:MO) and telecommunications giant ATT (NYSE:T) have defied this trend in 2024. Despite their exceptional returns (see below), both stocks are on pace to keep up with the strong S&P 500 and perhaps surpass its performance before the end of the year.
Can these former laggards actually outperform the S&P 500 in 2024? Let’s dig deeper to find out.
Altria: A Proven Value Creator
Altria, maker of Marlboro cigarettes, has had an exceptionally strong performance this year. Despite this ongoing secular decline in cigarette consumption, Altria shares have provided a total return (including dividends) of 19.3% this year, compared to the S&P 500’s 16% total return.
While this outperformance is likely due to a broadening global bull market rather than a company-specific phenomenon, Altria still makes a compelling investment case. Speaking of which, it pays a gargantuan annualized yield of 8.51% and trades at just 9 times forward earnings. For context, the S&P 500 trades at 22.6 times forward earnings at the time of writing.
Now the tobacco giant has a very high value payment rate 81%, but its 54-year track record of consecutive dividend increases implies that a reduction is highly unlikely in the short term. Altria is also enjoying a very strong launch of its new e-cigarette brand, NJOY, which should help offset the decline in its core tobacco business.
What does Wall Street think? Based on analysts’ consensus 12-month price target, the stock’s implied upside potential is 3.3%. This isn’t high-growth territory, to be sure, but it could be enough to overtake the S&P 500 by the end of 2024 (see later).
AT&T: an undervalued telecommunications company
AT&T is entering a new era. With its media misadventure in the rearview mirror and the U.S. telecommunications industry reaching a price equilibrium, investors have begun to bid up the company’s shares after a multi-year low.
To wit, AT&T stock has so far generated a total return of 15.8% this year, essentially at a standstill with the S&P 500 in terms of performance this year.
Why might your shares keep rising? AT&T pays a fairly generous yield of 5.9%, and its 59.6% payout ratio implies that dividend payments are comfortably covered by profits. What’s more, AT&T stock is attractively priced at just 8.45 times forward earnings.
While AT&T isn’t a growth machine, it has a nationwide 5G wireless network with broad spectrum and a fiber network that covers nearly a quarter of the country. Wall Street believes the telecommunications company’s deep-rooted competitive position, exceptional earnings and attractive valuation should work together to generate another 6.5% gain over the next 12 months.
Verdict
The S&P 500 trades at a premium valuation relative to historical norms. Furthermore, the benchmark depends heavily on Nvidia at the time. While its long-term prospects remain incredible, Nvidia may struggle in the short term due to its lofty valuation.
In that case, Altria and AT&T could actually 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 mouth-watering yields and compelling valuations.
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George Budwell holds positions at AT&T. The Motley Fool has positions and recommends Nvidia. The motley fool has a disclosure policy.
Can These Two Ultra-High-Yield Dividend Stocks Outperform the S&P 500 in 2024? was originally published by The Motley Fool
