One of the greatest things about putting your money to work on Wall Street is that there's no one-size-fits-all strategy to build wealth. Nevertheless, some investment strategies are more consistent than others at generating positive returns.
Over the last half-century, few strategies have been more profitable than buying and holding dividend stocks. Companies that regularly share a percentage of their profits with investors tend to be profitable on a recurring basis and time-tested. In other words, just the type of businesses we'd expect to deliver superior long-term returns.
But you don't have to take my word for it. In The Power of Dividends: Past, Present, and Future, the investment advisors at Hartford Funds compared the returns of income stocks to non-payers over a 50-year stretch (1973-2023). This study found that dividend stocks have delivered an average annual return that more than doubled up non-payers over the last half-century -- 9.17% vs. 4.27%.
However, not all dividend stocks are created equally. Although ultra-high-yield stocks -- those with yields that are at least four times greater than the yield of the S&P 500 -- can be tempting, they require a lot of extra vetting to avoid falling into a yield trap. Since yield is a function of payout relative to share price, a failing or struggling operating model can lure unsuspecting investors into a "trap."
Thankfully, not all ultra-high-yield stocks are bad news. Based on price targets issued by select Wall Street analysts, the following two ultra-high-yield dividend stocks can deliver total returns, including their dividends, of up to 92% over the next 12 months.
Ford Motor Company: Implied total return of 92%
The first supercharged income stock that offers substantial upside, at least based on the forecast of one Wall Street analyst, is automotive stalwart Ford Motor Company (NYSE: F). Bank of America's John Murphy is looking for Ford to reach $20 per share, which including its $0.60 base annual payout (currently a 5.6% yield) would result in shareholders netting a 92% return over the next 12 months.
Ford has struggled in recent quarters, with warranty expenses weighing on its profits. To add, the shift to electric vehicles (EVs) hasn't gone as planned. Demand has waned for EVs, leading to sizable losses in Ford's Model e segment.
In spite of these headwinds, there are reasons to believe Murphy's lofty price target is attainable.
For one, Ford has the ability to adjust its spending, as needed, to meet demand. Last year, management announced that it would defer approximately $12 billion in EV spending until demand picked up. Being able to hit the brake or punch the accelerator gives Ford plenty of financial flexibility.
Secondly, (and pardon the necessary pun) Ford's internal combustion-engine segment continues to fire on all cylinders. The company's F-Series pickup has been the best-selling truck in the U.S. for 47 straight years, as well as the top-selling vehicle (period!) over the last 42 years. Maintaining dominance among trucks is especially important for Ford given that trucks and SUVs generate juicier margins than sedans.
The final puzzle piece for Ford is that its quality control measures appear to be improving. Despite still working its way through warranty expenses, Ford is near the top of the list in J.D. Power's 2024 U.S. Initial Quality Study. These quality studies suggest internal control measures have meaningfully improved since Jim Farley became Ford's CEO in October 2020.
A cash-rich balance sheet, coupled with abundant operating cash flow and a forward price-to-earnings (P/E) ratio below 6, suggest Ford can motor higher.
Pfizer: Implied total return of 60%
The second ultra-high-yield dividend stock with scorching-hot upside, based on the prognostication of one Wall Street analyst, is pharmaceutical juggernaut Pfizer (NYSE: PFE).
According to Cantor Fitzgerald's Louise Chen, Pfizer's stock can head to $45. Inclusive of Pfizer's $1.68 per share base annual payout, which is producing a 5.8% yield, the implication is that this drug giant can deliver a 60% total return for its shareholders over the coming 12 months.
Pfizer's stock has struggled mightily as sales of its blockbuster COVID-19 drugs, Comirnaty and Paxlovid, have retraced. After generating north of $56 billion in combined sales in 2022, these two therapies are pacing about $8.5 billion in total revenue this year.
But it's equally important to recognize that this is $8.5 billion in high-margin net sales that Pfizer didn't have when this decade began. Based on the midpoint of Pfizer's 2024 sales guidance of $61 billion, it's on pace to have delivered 46% aggregate growth in revenue over a four-year period. That's impressive for a mature drug company, and it suggests Pfizer is a stronger company now, financially, than it was when it began the decade.
To build on the above, Pfizer's organic growth needle is moving in the right direction. During the June-ended quarter, net sales for the company grew 3%, inclusive of its COVID-19 treatments. But if these blockbuster therapies are excluded, Pfizer's sales jumped by 14% on a constant-currency basis. The company's vast portfolio of brand-name treatments in oncology and specialty care continue to deliver meaningful constant-currency sales growth.
Pfizer should also benefit nicely from its recent $43 billion acquisition of cancer-drug developer Seagen. Though acquisition-related expenses are working against Pfizer's bottom line in 2024, the combination of cost-savings and a deeper oncology pipeline and portfolio should lift the company's long-term growth prospects.
With a beefed-up oncology pipeline and a forward P/E ratio of just 10, Pfizer has room for multiple expansion.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Pfizer. The Motley Fool has a disclosure policy.
2 Ultra-High-Yield Dividend Stocks With Total Return Potential of Up to 92% in 12 Months, According to Select Wall Street Analysts was originally published by The Motley Fool