When it comes to high-yield dividend stocks, it’s not a matter of quantity, but of quality. There are numerous stocks with forward dividend yields of 5% or higher, but many of them are firmly in the “yield trap” category.
That is, either they are at risk of a dividend cut or of price declines that exceed the returns from their quarterly cash payouts. It’s best to be selective with dividend stocks, but filtering for quality, a few stocks stand out as compelling long-term buys in today’s market: Energy Transfer (NYSE: ET), Pfizer (NYSE: PFE), and United Parcel Service (NYSE: UPS).
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Energy Transfer offers a high yield and an AI growth catalyst
Energy Transfer is a master limited partnership (MLP) focused on owning midstream energy assets like pipelines. As a pass-through entity, Energy Transfer pays out most of its pretax income to investors as quarterly cash distributions. Based on the current distribution rate, this MLP stock has a forward yield of 6.6%.
Historically, Energy Transfer has steadily increased payouts by an average of 2% to 4% annually. However, payout growth could be far greater going forward, thanks to Energy Transfer’s indirect exposure to the artificial intelligence (AI) megatrend.
AI data centers, hungry for energy, are boosting demand for midstream energy infrastructure. Capitalizing on this trend, Energy Transfer is targeting 3% to 5% annualized distribution growth in the years ahead. Assuming shares appreciate over the long term in line with distribution growth and this MLP continues to sport an above-average yield, this popular pipeline stock could deliver solid total returns for long-term investors.
“Yield trap” worries are overblown with Pfizer
Pfizer sports a nearly 7% forward dividend yield. Shares also trade at a super low 8.5 times forward earnings. With these metrics, some may see “super bargain,” but others see “value trap,” especially given Pfizer’s weak fiscal performance in recent years.
However, poor sentiment for what has become one of the most undervalued pharmaceutical stocks could work in your favor. Yes, Pfizer continues to contend with dwindling demand for COVID-19 vaccines and treatments. The company also faces a major patent cliff in 2028, when it loses patent exclusivity on its flagship drug, anticoagulant Eliquis.
