Building a portfolio of high-yield dividend stocks can set you up for a lifetime of passive income. But investing in dividend stocks is much more complex than simply picking the stock with the highest yield. Finding an ultra-high-yield dividend stock trading at a fair price that has the potential to keep raising its dividend is the key to unlocking sustainable passive income.
Buying a handful of those stocks at a good value and holding them forever could create the cornerstone of a dividend portfolio. Here are three potential candidates to consider.
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1. Pfizer
Pfizer (NYSE: PFE) is one of the largest pharmaceutical companies in the world. The company's share price soared in 2021 after the successful development and rollout of a COVID-19 vaccine. However, Pfizer's COVID-19-related sales haven't been able to keep up with expectations. As a result, the stock has fallen considerably from its late-2021 highs.
But that may be a great opportunity for investors.
After ramping up spending to support the development and sale of its COVID-19 vaccine and treatment, Paxlovid, management is unwinding that move and cutting costs aggressively. During its first-quarter update, management said it was on track to cut $4 billion in net costs by the end of the year. That should help push its operating margin back toward the mid-20% range.
Meanwhile, Pfizer's broad portfolio of medications and treatments ensures that it produces strong enough revenue that it can reinvest in research and development (R&D) while producing substantial free cash flow. Its pipeline of drugs includes breast cancer drug atirmociclib, currently in phase 3 trials, and its oral weight loss drug danuglipron in phase 2b trials. A strong pipeline of patent-protected drugs ensures it can stand up to competition from generics as patents expire.
Despite the recent pressure on free cash flow amid the sales downturn, management reiterated its commitment to the company's dividend during the first-quarter earnings call . "Our No. 1 priority from a capital allocation perspective is both supporting and growing our dividend over time, and that is not at risk," CFO Dave Denton told analysts. With the strong pipeline and cost-cutting measures, it's only a matter of time before free cash flow improves and the dividend can grow even faster.
2. Enbridge
Enbridge (NYSE: ENB) operates a huge portfolio of oil and natural gas pipelines . Additionally, it operates several gas utilities. As a result, it produces very steady revenue year in and year out.
Its pipelines transport about 30% of all the oil produced in North America and 20% of all the gas consumed in the U.S. Enbridge isn't resting on its laurels, though. The company is currently building several projects that will expand its operations and provide a nice revenue boost as they come online. Management forecasts 3% annual distributable cash flow growth from the backlog of projects through 2025 and 5% growth from 2026 onward.
Meanwhile, Enbridge is taking opportunities to grow via acquisition. Last year, it acquired three utilities from Dominion Energy , nearly doubling its gas distribution business. Acquisitions help Enbridge scale its business, providing a moat against new competition entering the market.
With its slow but predictable 3% to 5% growth in distributable cash flow, Enbridge should be able to sustain steady growth in its 7.3%-yielding dividend. The stock looks attractive at its current price, trading at an enterprise-value-to- EBITDA ratio of just 12.5x. So, investors may get some capital appreciation as well.
3. Altria Group
Despite declining tobacco use in the United States, Altria Group (NYSE: MO) has managed to maintain its revenue and grow its dividend for years. That's thanks to its strong pricing power and its ability to move with the changing times.
That said, it's had its fair share of missteps. Massive investments in cannabis producer Cronos and vape producer Juul Labs didn't work out very well. But its acquisition of NJOY, which makes pod-based vapes, has helped it weather the transition away from cigarettes. It's also built a premium brand of nicotine pouches, called on!
It's worth pointing out that Altria's concentration on the U.S. market is an advantage relative to other tobacco companies. Cigarettes and other nicotine products are much more affordable in the U.S. than in other countries. That gives Altria room to raise prices to offset declining unit sales.
Despite the secular headwinds faced by its well-known Marlboro cigarette brand and less premium cigarettes, Altria is managing the company in a very shareholder-friendly manner. It's buying back shares, utilizing an accelerated share repurchase program earlier this year. That supports strong earnings-per-share growth, and gives it room to increase its dividend without increasing its total cash paid out.
The stock currently yields around 7.9%, and that dividend should steadily grow each year as a result of the company's strong free cash flow. With shares trading at an enterprise-value-to-EBITDA ratio of just 8.4x, the stock looks like a great value. Despite the challenges of the market, Altria is well-positioned to keep producing solid dividend growth for investors.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enbridge and Pfizer. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy .
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