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Want $1,000 in Super Safe Annual Dividend Income? Invest $9,950 Into the Following 3 Ultra-High-Yield Stocks

Motley Fool - Thu Sep 7, 2023

Few investment strategies swing the pendulum in investors' favor quite like buying dividend stocks.

Approximately 10 years ago, a report from the wealth management division of money-center bank JPMorgan Chase demonstrated the power of putting your money to work in time-tested income stocks. When examined over a 40-year period, the publicly traded companies that initiated and grew their payouts delivered a hearty annualized return of 9.5%. Comparatively, the non-payers trudged their way to an annualized gain of just 1.6%. Over the long run, dividend stocks usually mop the floor with companies that don't offer a payout.

A messy stack of one hundred dollar bills.

Image source: Getty Images.

The "catch" for income-seeking investors is that ultra-high-yield stocks -- those with yields of 7% or above -- can sometimes be more trouble than they're worth. Statistically speaking, risk and yield tend to go hand in hand once high-yield status (4% and above) is reached. While this doesn't mean ultra-high-yield stocks are off-limits, it does imply that some extra vetting needs to be done by investors.

The good news for long-term investors is that safe, reliable income can be achieved. If you want about $1,000 in super safe annual dividend income, all you'd have to do is invest $9,950 (split equally, three ways) into the following three ultra-high-yield stocks, which sport an average yield of 10.06%.

Verizon Communications: 7.61% yield

The first exceptionally safe, supercharged dividend stock that can help investors generate $1,000 in annual dividend income from an initial investment of $9,950 (split three ways) is telecom stockVerizon Communications(NYSE: VZ).

Since yield is a function of payout relative to share price, Verizon's 7.6% yield is predominantly a reflection of its share price being nearly halved since November 2020. Being a mature business with low-single-digit sales growth, Verizon was easily passed up by investors in favor of high-growth tech stocks that could take advantage of (at the time) historically low lending rates.

Additionally, Verizon has recently taken heat following a report from The Wall Street Journal that implies sizable financial liabilities for legacy telecom providers still using lead-sheathed cables.

Although the WSJ report does note a tangible concern for Verizon, it also blows the company's potential financial liability out of proportion. Verizon has stated that lead-sheathed cables make up a small percentage of its existing network. Further, if there is financial liability on Verizon's end, it would almost certainly take years to determine in court.

What Verizon brings to the table is boring, yet predictable, operating cash flow, along with a handful of modest growth catalysts through at least mid-decade.

To address the former, consumers are highly unlikely to give up their smartphones, wireless service, or internet access, if the U.S. economy struggles. With historically low churn rates in its corner, Verizon can count on very predictable operating cash flow year in and year out.

With regard to catalysts, Verizon should benefit from the ongoing upgrade of wireless networks to support 5G speeds. After a decade of 4G LTE download speeds, consumers have demonstrated an eagerness to upgrade their wireless devices. The big win for Verizon will come in the form of increased data consumption for its wireless segment, as well as ongoing net broadband additions. This should all lead to modest single-digit sales growth and a sustainable 7%+ yield.

Innovative Industrial Properties: 8.39% yield

A second super safe ultra-high-yield dividend stock that can help produce $1,000 in annual dividend income from a starting investment of $9,950 (split equally, three ways) is marijuana-focused real estate investment trust (REIT)Innovative Industrial Properties(NYSE: IIPR), which is better-known as "IIP." IIP purchases marijuana cultivation and processing facilities, which it then leases out over long periods.

Most marijuana stocks have been pulverized over the past two-plus years. When Joe Biden won the presidency, there had been excitement that a Democrat-led Congress would finally lead to cannabis reforms. However, those hopes were quickly dashed, and cannabis remains firmly a Schedule I controlled substance on the federal level.

Interestingly, though, IIP actually benefits from marijuana remaining illegal at the federal level. As long as weed is illicit, cannabis companies' access to basic financial services is spotty, at best. IIP has stepped in with sale-leaseback arrangements to resolve this issue. Under these arrangements, IIP purchases assets with cash and immediately leases the property back to the seller. This is providing multi-state operators with much-needed cash, while netting IIP long-term tenants.

The cannabis REIT operating model also tends to be highly predictable. Despite a short-lived period of above-average delinquencies during the first quarter, IIP collected 97% of its rental income and property management fees during the second quarter. Given the weighted-average remaining lease term of 14.9 years on the more than 100 properties IIP owns, funds from operations (FFO) should be transparent for a long time to come.

Furthermore, 99.9% of the leases the company has outstanding are triple-net (also known as "NNN-leased"). A triple-net lease requires the tenant to pay for all costs associated with the property, including traditional expenses like utilities, as well as maintenance, property taxes, and insurance. The advantage of a triple-net lease is that it removes unexpected costs from the equation and makes IIP's FFO that much more predictable.

If you want one more good reason to buy Innovative industrial Properties' stock, consider this: It's increased its quarterly distribution by 1,100% since its very first payout in June 2017.

An excavator placing payload into the back of a dump truck in an open-pit mine.

Image source: Getty Images.

Alliance Resource Partners: 14.18% yield

The third ultra-high-yield dividend stock that can yield $1,000 in super safe annual dividend income from an initial investment of $9,950 (split equally, three ways) is coal company Alliance Resource Partners(NASDAQ: ARLP). Yes, I did say "coal company," and yes, its 14.2% yield is very real and sustainable.

Entering this decade, coal stocks were expected to be left for dead. The rise of renewable energy investments implied that coal usage would be phased out over time. Then the COVID-19 pandemic hit and changed everything. With the supply of crude oil constrained globally due to a combination of capital underinvestment and Russia's war with Ukraine, it's the coal industry that's come out looking like a diamond in the rough.

Even though the per-ton price of coal has backed substantially off of the record highs that were set roughly one year earlier, per-ton prices are still considerably higher than they've ever been. That's great news for coal producers like Alliance Resource Partners.

However, higher coal prices at the moment tell just part of the story. One reason Alliance Resource is such a special company is because its management team regularly locks in volume and price commitments up to four years in advance. Through June 30, the company notes that 34.5 million tons have been priced and committed for 2023 and 26.9 million tons for 2024. That's approximately 96.5% and 75.2% of its total expected coal production, based on the midpoint of its 2023 estimate (35.75 tons). Booking orders in advance at favorable per-ton prices ensures the company's operating cash flow remains predictable.

To add to the above, Alliance Resource Partners has a history of modest production expansion. While it can be tempting to meaningfully increase production with per-ton coal prices well above historic norms, the company's management team has avoided taking on too much debt. As a result, Alliance Resource Partners offers superior financial flexibility among publicly traded coal stocks.

Valued at less than 4X Wall Street's forecast earnings in 2023 and 2024, Alliance Resource Partners looks like an absolute steal among ultra-high-yield stocks.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Innovative Industrial Properties. The Motley Fool has positions in and recommends Innovative Industrial Properties and JPMorgan Chase. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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