Arguably the greatest aspect of putting your money to work on Wall Street is that there's no one-size-fits-all strategy to generate wealth. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, there are bound to be securities that can help you meet your investment goals.
But among these seemingly countless investment strategies, it's hard to overlook just how successful buying and holding dividend stocks has been for patient investors.
Companies that pay a regular dividend to their shareholders tend to have a few things in common. They're almost always profitable on a recurring basis, time-tested, and capable of providing transparent long-term growth outlooks. In other words, these are the types of businesses we'd expect to increase in value over the long run.
Image source: Getty Images.
Perhaps more importantly, dividend stocks offer a rich history of outperformance. In The Power of Dividends: Past, Present, and Future, the researchers at Hartford Funds compared the average annual return of dividend stocks to non-payers over a 50-year period (1973-2023). Hartford Funds found that dividend stocks more than doubled the average annual return of non-payers (9.17% versus 4.27%), and did so while being less-volatile than the benchmark S&P 500.
Taking into account that this is one of the priciest stock markets in history, buying time-tested dividend stocks might be a genius strategy for 2025.
What follows are three of the safest ultra-high-yield dividend stocks -- "ultra-high-yield stocks" have yields that are at least four times greater than the yield of the S&P 500 -- to buy in the new year, which are yielding an average of 8.53%!
Pfizer: 6.72% yield
The first ultra-high-yield dividend stock that makes for a no-brainer buy in the upcoming year is pharmaceutical juggernaut Pfizer (PFE -0.67%). Though Pfizer has been weighed down by shrinking sales from its line of COVID-19 therapies, this is a company that's unmistakably in better shape now than it was when the decade began.
For example, even though sales of its blockbuster COVID-19 therapies, Comirnaty and Paxlovid, have retraced from north of $56 billion in 2022 to an estimated $8.5 billion in 2024, this is still $8.5 billion in high-margin revenue that didn't exist when the decade began. In just four years, the company's sales are on pace to have climbed by more than $19 billion (roughly 46%), based on the midpoint of its 2024 guidance.
To add to this point, Pfizer's cumulative product portfolio, sans COVID-19 therapies and acquisitions, has continued to expand on an organic basis. Investors seem to be overly focused on the recent pullback in COVID-19 sales and have completely missed the bigger picture that shows Pfizer's oncology and specialty care segments are firing on all cylinders.
Another reason investors can trust Pfizer in the new year is because of its December 2023 acquisition of cancer-drug developer Seagen. This combination vastly expands Pfizer's product portfolio and oncology pipeline and should result in meaningful cost-savings in 2024 and beyond.
It should also be noted that healthcare is a highly defensive industry. No matter how well or poorly the U.S. and global economy are performing, people will still become ill, require medical care, and need prescription medicine. This consistency in demand allows Pfizer to navigate uncertain environments with a good degree of cash-flow predictability.
Pfizer makes for a safe and smart investment with its yield approaching 7% and its shares valued at less than 9 times forecast earnings per share (EPS) in 2025.
Image source: Getty Images.
Annaly Capital Management: 13.14% yield
A second ultra-high-yield dividend stock that makes for a slam-dunk buy in the new year is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY -0.84%). Though Annaly's jaw-dropping yield of more than 13% might strike investors as unsustainable, it's been averaging a roughly 10% yield over the last two decades.
Mortgage REITs might be the most-disliked industry on Wall Street. These are businesses that aim to borrow at low short-term rates and purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). This operating dynamic means mortgage REITs like Annaly are highly sensitive to changes in interest rates. The steepest rate-hiking cycle in four decades between March 2022 and July 2023 squeezed the net interest margin for Annaly and its peers.
What makes Annaly Capital Management so intriguing is that the Federal Reserve has now shifted to a rate-easing cycle. Declining interest rates tend to reduce short-term borrowing costs and allow mortgage REITs to expand their net interest margin. Historically, Annaly has performed its best when the nation's central bank is lowering rates and making methodical, well-telegraphed moves.
At the same time, the average yield on the MBSs held in Annaly's portfolio should continue to rise with rates expected to decline at a slow but steady pace. In other words, the rapid rate-hiking cycle the Fed undertook to quell high inflation has lifted the yields on the MBSs Annaly has been buying.
Investors can also feel confident buying into Annaly because it's primarily focused on agency assets. An "agency" security is one that's backed by the federal government in the event that the underlying asset defaults. This added layer of protection allows the company to lever its investments and sustain its juicy double-digit yield.
With Annaly Capital Management expected to benefit from a declining-rate environment and its stock trading close to its book value, now looks like the perfect time for opportunistic income seekers to hop aboard.
Realty Income: 5.72% yield
The third exceptionally safe ultra-high-yield dividend stock to buy in 2025 is premier retail REIT, Realty Income (O -0.32%). Realty Income doles out its dividend on a monthly basis and has increased its payout in each of the last 109 quarters -- a stretch of more than 27 straight years.
Annaly Capital Management isn't the only REIT that's set to enjoy a nice lift from the Fed's dovish shift in monetary policy. Higher Treasury yields tend to lure income seekers away from high-yield equities and toward ultra-safe government bonds. With the central bank lowering interest rates, it should reignite interest in stocks with higher yields, such as Realty Income.
What's made this retail REIT such a surefire investment for decades is its top-notch commercial real estate (CRE) portfolio. It closed out the September quarter with close to 15,500 CRE properties, of which approximately 90% were "resilient to economic downturns and/or isolated from e-commerce pressures." Realty Income focuses on stand-alone stores that sell goods and services that are needed in any economic climate. This means rental delinquencies are rarely an issue.
Something else that's not a problem for Realty Income is getting its renters to stick around. It ended the September quarter with an occupancy rate of 98.7% and an average occupancy rate of 98.2%, dating back to the start of the 20th century. By comparison, the median occupancy rate for S&P 500 REITs is 400 basis points lower (94.2%) this century.
While Realty Income's retail-driven CRE model is working great, it hasn't stopped the company from expanding its horizons and making acquisitions. It acquired Spirit Realty Capital in January to complement its existing property portfolio, and forged a joint venture with Digital Realty Trust last year to develop and rent build-to-suit data centers. Diversifying its rental stream will only make Realty Income's funds from operations more predictable and secure.
To rounds things out, Realty Income stock is historically cheap. Shares are valued at 12.5 times forecast cash flow for 2025, which represents a 25% discount to its average multiple to cash flow over the trailing-five-year period.
