These high-powered income stocks, with yields ranging from 5.4% to 11.3%, have the sustained catalysts needed to deliver a 233% total return in 12 years.
Though it can be an unpleasant realization for new and tenured investors, stock market corrections are perfectly normal. Data from sell-side consultancy firm Yardeni Research shows that there have been 39 separate, double-digit percentage declines in the S&P 500 since 1950 began. That translates to one correction, on average, every 1.87 years.
Last year marked the latest of these declines, with the ageless Dow Jones Industrial Average, benchmark S&P 500, and technology-led Nasdaq Composite all entering a bear market.
However, every bear market throughout history has been something of a blessing in disguise for patient investors. Even though we’ll never know ahead of time when the stock market will bottom, we do know that every previous correction and bear market have resulted in the major indexes eventually hitting new highs. It means significant market pullbacks are a surefire buying opportunity for long-term investors.
But not all investors share the same risk tolerance. Thankfully, conservative investors don’t have to buy volatile stocks to generate meaningful long-term returns. The bear market has created discounts aplenty among high-quality dividend stocks. Companies that pay a regular dividend tend to be profitable and time-tested, and to offer a phenomenal long-term track record.
What follows are three magnificent dividend stocks that can safely turn an initial investment of $300,000 into $1 million, including payouts, by 2035.
Enterprise Products Partners: 7.51% yield
The first top-notch dividend stock that has all the tools and intangibles needed to safely deliver a total return of 233%, including payouts, from an initial investment of $300,000 over the next 12 years is energy stock Enterprise Products Partners (EPD 0.19%). Enterprise has raised its base annual distribution in each of the past 24 years.
Some of you might be leery about putting money to work in an oil and gas stock after what happened three years ago. Initial lockdowns tied to the COVID-19 pandemic sent crude oil and natural gas demand off a cliff, which pushed West Texas Intermediate crude oil futures briefly, but deeply, into the negative.
However, Enterprise Products Partners largely avoided this operating tumult in 2020 due to its position within the energy complex. It’s one of America’s largest midstream operators, with over 50,000 miles of transmission pipeline, 29 natural gas processing facilities, and the ability to store 14 billion cubic feet of natural gas and 260 million barrels of oil, natural gas liquids, and refined product. In other words, it’s an essential energy middleman in an industry that’s expected to see global fossil fuel needs continue to climb through at least 2030, if not well beyond.
The big advantage Enterprise Products Partners brings to the table is the structure of its contracts. Approximately 75% of its gross operating margin in 2022 came from fixed-fee agreements. This type of contract with drilling companies eliminates spot-price volatility and ensures cash-flow predictability. Being able to accurately forecast its annual cash flow is critical when it comes to outlaying capital for infrastructure projects, acquisitions, and its ever-growing distribution.
What’s more, the global energy supply chain remains broken and will probably take years to correct. Three years of capital underinvestment by energy majors due to pandemic-related uncertainty, coupled with Russia’s invasion of Ukraine, will make it virtually impossible to meaningfully increase oil and gas supply anytime soon. That’s a recipe for higher energy-commodity prices, which should help Enterprise Products Partners land new long-term contracts.
PennantPark Floating Rate Capital: 11.28% yield
A second magnificent dividend stock that can safely turn a $300,000 initial investment into $1 million by 2035, when payouts are included, is business development company (BDC) PennantPark Floating Rate Capital (PFLT 1.33%). PennantPark doles out a $0.10/share monthly dividend (yes, monthly!), which works out to a current yield of nearly 11.3%. If you reinvested your payouts at this yield and the company’s share price were static, the dividend alone would allow you to reach $1 million by 2035.
BDCs invest in the equity (common or preferred stock) or debt of middle-market companies — businesses with market caps of less than $2 billion. As of the end of 2022, PennantPark had 87% of its $1.15 billion investment portfolio tied up in debt investments, with the remainder in common and preferred stock holdings.
PennantPark Floating Rate Capital’s debt-investment approach comes with three key advantages. First off, middle-market companies tend to be unproven, which means their access to debt and credit markets is limited. This limitation allows PennantPark to net above-average yields on the debt securities it holds.
Second, PennantPark pretty much exclusively invests in first-lien secured debt. All but $0.1 million of its $998.3 million debt-investment portfolio is first-lien secured. First-lien secured debt is first in line for repayment in the event that one of the small companies it’s invested in seeks bankruptcy protection. By spreading its $1.15 billion in investments, including equity holdings, across 126 companies and gravitating to first-lien secured debt, PennantPark has done a phenomenal job of de-risking its portfolio.
The third key advantage for PennantPark is that 100% of its debt investments bear variable rates. Every time the Federal Reserve raises interest rates, it’s going to put more money into PennantPark’s pockets by increasing the yield on its debt investments. Between Sept. 30, 2021 and Dec. 31, 2022, the weighted average yield on its debt investments soared from 7.4% to 11.3%
PennantPark Floating Rate Capital proves you don’t need to own a megacap stock to deliver safe, but substantial, long-term gains.
IMAGE SOURCE: GETTY IMAGES.
Walgreens Boots Alliance: 5.41% yield
The third magnificent dividend stock that can safely turn a $300,000 investment into a cool $1 million, including payouts, by 2035, is none other than pharmacy chain Walgreens Boots Alliance (WBA -0.94%). Walgreens is nearing Dividend King status given its 47 consecutive years of base annual dividend hikes. At the moment, it’s doling out an inflation-fighting 5.4% yield.
In general, healthcare stocks tend to be a safe place to put your money to work. Since we have no control over when we become ill or what ailment(s) we develop, demand for healthcare services, prescription drugs, and medical devices is pretty consistent no matter what the economy throws our way.
However, Walgreens was the very rare exception to this rule during the pandemic. Because it has a brick-and-mortar-dependent operating model, lockdowns reduced foot traffic into its stores and hurt everything from front-end retail sales to its clinic revenue. While this has been a temporary setback for the company, it’s allowing patient investors to buy in at an advantageous price.
The pandemic served as a wake-up call for Walgreens Boots Alliance in a variety of ways, with management making a number of strategic changes that are designed to improve the company’s operating margin and bolster repeat visits.
Following years of horizontal growth (i.e., new store additions), Walgreens has put vertical expansion at the forefront of its growth strategy. It’s invested billions into VillageMD and aims to rapidly grow its healthcare services revenue. This dynamic duo has opened 210 full-service, physician-staffed health clinics co-located at Walgreens’ stores, with a goal of hitting 1,000 clinics by the end of 2027. Since these clinics are full-service, they’re designed for repeat patients and should help build consumer trust in major cities.
Another lesson Walgreens’ management team learned from the pandemic that’s beginning to translate into healthy organic growth is its digitization push. Even if Walgreens generates the bulk of its revenue from its physical stores, convenience is increasingly important for shoppers. Investing in its website and streamlining its supply chain can provide incremental positives for the company.
It’s also worth pointing out that Walgreens reduced its annual operating expenses by more than $2 billion, as well as sold its wholesale drug business for $6.5 billion to reduce its outstanding debt.
With Walgreens Boots Alliance trading at roughly 7 times Wall Street’s forward-year consensus earnings, it’s as cheap as it’s ever been as a publicly traded company.
