Even though interest rates are rising rapidly, the average dividend yield in the S&P 500 Index remains low at around 1.7%. As a result, income investors should focus on higher-yielding securities if they want additional income from their stock portfolios.
The good news is, investors do not have to sacrifice quality when buying higher-yielding stocks. There are many stocks yielding over 4%. For investors who want even more income, there are ultra-high dividend stocks with yields above 6%.
Ultra High-Yield Stock: British American Tobacco (BTI)
British American Tobacco is one of the world’s largest tobacco companies. British American Tobacco owns many tobacco brands, including Kool, Benson & Hedges, Dunhill, Kent, and Lucky Strike. Despite being headquartered in the United Kingdom, British American Tobacco triggers no dividend withholding tax for United States investors.
British American Tobacco was able to generate 8% group-wide revenue growth during fiscal 2022. This revenue growth was driven, among other factors, by a strong performance of the non-combustible product portfolio the company has been investing heavily in, and which now generates 11% of the company’s overall revenue, and which has grown at a rate of 41% over the last year. British American Tobacco generated adjusted earnings-per-share growth of 13% during the period, which was quite attractive.
For the current year, fiscal 2023, British American Tobacco expects that its revenue will grow by 3% to 5% at constant currency rates, mostly driven by growth in its New Categories business. Earnings-per-share are forecast to grow by around 5% at constant currency rates. The stock yields over 6%.
Ultra High-Yield Stock: Western Union (WU)
The Western Union Company is the world leader in the business of domestic and international money transfers. The company has a network of approximately 550,000 agents globally and operates in more than 200 countries. About 90% of agents are outside of the US.
Western Union operates three business segments, Consumer-to-Consumer (C2C), Business Solutions, and Other (bill payments in the US and Argentina). Approximately 87% of revenue is now from C2C, 8% from Business Solutions and 5% from Other. The company had ~$4.5B in revenue in fiscal 2022.
Western Union reported Q4 2022 and full-year results on February 7th, 2023. Companywide revenue fell (-15%) to $1,091.9M from $1,284.8M and diluted GAAP earnings per share increased 55% to $0.65 in the quarter compared to $0.42 in the prior year. Revenue declined because of lower volumes in North America, Europe, Asia, Middle East, and Africa offset by Latin and Central America. The conflict in Ukraine is affecting business and Western Union closed its operations in Russia and Belarus. On the plus side the company partnered with 7-11 and Rite Aid in the quarter.
Western Union’s competitive advantage stems from its C2C business and unrivaled network of agents that process transactions. The company strengthens its network effect with partnerships and now with its digital money transfer effort, app, and westernunion.com. Importantly, Western Union is now partnered with Walmart.
The stock has a current dividend yield of 8.7%.
Ultra High-Yield Stock: Magellan Midstream Partners LP (MMP)
Magellan Midstream Partners is a Master Limited Partnership in the oil and gas industry. It has the longest pipeline system of refined products, which is linked to nearly half of the total U.S. refining capacity. This segment generates 65% of its total operating income while the transportation and storage of crude oil generates 35% of its operating income. MMP has a fee-based model; only ~9% of its operating income depends on commodity prices.
MMP has posted positive free cash flows for more than 10 consecutive years and has a strong balance sheet. In addition, it does not dilute unitholders and maintains a healthy payout ratio. All these attributes confirm the discipline of its management, which invests only in high-return projects.
In early February, MMP reported (2/2/23) financial results for the fourth quarter of fiscal 2022. Distributable cash flow grew 16% over the prior year’s quarter, mostly thanks to increased volumes of refined products and improved commodity margins. MMP has proved resilient to the pandemic and provided strong guidance for 2023. It expects annual distributable cash flow of $1.8 billion and a distribution coverage ratio of 1.4 for the full year.
MMP units currently yield 7.5%.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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