Investing in the stock market has long proven itself as a winning formula for generating wealth, though there are many paths to profits. One of the best is buying dividend stocks.

Dividend stock investing has outperformed all other classes of stock over many decades. For the past 50 years, income-generating stocks produced annual average returns of 9.2%, according to data from Hartford Funds, compared to 4.7% for non-payers. 

Yet some investors looking for dividend stocks often make the mistake of simply choosing those paying the highest yields. While Wellington Management separately found that high-yield dividend stocks outperformed all other classes between 1930 and 2022, they also discovered that those with high yields — but not the highest — performed best. In fact, such stocks never had a losing decade. 

Still, with the stock market near all-time highs, it is not so easy to find stocks offering lucrative payouts that also present significant growth potential. The following two ultra-high-yield dividend stocks give investors a perfect combination of income and capital appreciation.

24/7 Wall St. Insights:

• Buying dividend stocks has proved to be one of the most successful strategies for generating lasting wealth for investors.
• Don’t just chase yield, though, as stocks with the highest yields could have problems. But since the 1930s, high-yield stocks have never had a losing decade.
• Sit back and let dividends do the heavy lifting for a simple, steady path to serious wealth creation over time. Grab a free copy of “2 Legendary High-Yield Dividend Stocks“ now.

Ares Capital (ARCC)

Ares Capital (NASDAQ:ARCC) is a business development company, or a company that invests in tomorrow’s growth stocks. It is the largest, publicly-traded BDC on the market with over 500 middle-market businesses worth $25 billion.

While ARCC stock is up 7% in 2024, that’s a more recent phenomenon based on the Federal Reserve cutting interest rates. For much of the year it treaded or was below water. Now that the central bank’s “higher for longer” interest rate policy is past, expect Ares Capital’s growth to accelerate.

That is because BDCs are highly leveraged and have to borrow money in order to lend to companies at higher rates to make a profit. The unprecedented action by the Fed to rapidly ratchet up interest rates over the course of a year or so just as quickly raised Ares’ costs. The new lower rate environment many predict going forward should bolster the BDC’s bottom line.

Like real estate investment trusts (REIT), BDCs are required to pay out at least 90% of their taxable income as dividends to shareholders. Ares dividend yields 9% annually and it has raised the payout at a blistering 26% rate for the past decade.

Pfizer (PFE)

Pharmaceutical giant Pfizer (NYSE:PFE) is the second high-yield dividend stock to buy. Its stock is down 28% from its pandemic salad days when sales of Covid therapeutics Cominarty and Paxlovid soared. Now that most people have put the global health crisis behind them, selling those shots is no longer easy. 

Fortunately, Pfizer has a portfolio of patented marketed drugs as well as a deep bench of treatments in clinical trials such that it has the financial wherewithal to withstand the withering of Covid drug sales.

It still has several years of strong growth in front of it before it faces a steep patent cliff in 2028. That’s the time when a large round of its top-selling drugs will lose their patent protection. Even so, it should survive just fine. Because of the diversity of its portfolio and its strong standing in the vaccine market, which weathers generic competition much better than other drugs, Pfizer is a strong pharma stock to own.

Pfizer pays a dividend that yields 5.7% annually and also has a 15 year track record of raising the payout. It makes this another excellent stock to buy for growth and income.

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