There are few investing strategies as successful as buying dividend stocks. When looked at over decades, income-generating equities have surpassed all other classes of stock.

Data from Hartford Funds and Ned Davis Research shows that over the 50-year period between 1973 and 2023, returns generated by dividend stocks beat the S&P 500 by nearly 19% and trounced non-paying stocks by better than two-to-one. And they did so with less volatility and risk than the index.

It makes sense that they would. Companies that pay dividends tend to be very successful, profitable businesses. They likely have been through more than a few business and economic cycles so that their top-flight management teams conservatively steward their financial resources and capital allocations to ensure their companies remain sound.

While high-yield dividend stocks tend to do better, those with ultra-high-yields need closer scrutiny by investors. Such large payouts relative to earnings can indicate deeper problems.

So if you are looking to generate $1,000 in annual passive income that is safe from turmoil, just put $15,002 evenly divided between these two ultra-high-yield stocks. They yield an average of 6.7% annually, or more than five times the average of the S&P 500.

24/7 Wall St. Insights:

• Over the past 50 years, dividend stocks have more than doubled the average annual return of non-income-generating stocks.
• Risks can be higher with ultra-high-yield stocks, which is why investors must perform more critical due diligence on them before buying.
• 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.

Antero Midstream (AM)

Midstream operator for the natural gas industry Antero Midstream (NYSE:AM) is the first ultra-high-yield dividend stock to buy. It owns and operates pipelines, compressor stations, and processing and fractionation plants for hydrocarbons in the Appalachian Basin. Most of its contracts are with its parent company, Antero Resources (NYSE:AR), an independent oil and gas company.

Yet over the years, Antero Midstream has made numerous, but selective, bolt-on acquisitions to ensure its business remains financially strong. The acquired businesses tend to be highly accretive to earnings, which has allowed the gathering and processing business to grow free cash flow (FCF). In its second quarter earnings report, it recorded FCF after dividends of $43 million, a 41% increase over the year-ago period. 

Its performance allowed ratings agency Standard & Poor’s to upgrade its credit rating to investment grade that should significantly reduce its interest expense. It is now the leader amongst its peers in capital efficiency and enjoys low breakeven costs.

Antero Midstream trades at just 11 times free cash flow and sports a dividend yield 6% annually.

Main Street Capital (MAIN)

The second ultra-high-yield dividend stock to buy is Main Street Capital (NYSE:MAIN), a business development company (BDC). It invests early on in the business cycle of small and mid-market growth companies to maximize its return on their potential.

Like real estate investment trusts (REIT), BDCs are required to pay out at least 90% of their taxable income as dividends to shareholders. Main Street’s dividend yields a very attractive 7.45% annually and has increased its payout at a 7.5% compound annual growth rate over the last five years.

Main Street Capital is one of the oldest BDCs on the market and remains a top-tier player in the space. Although the BDC’s stock struggled through the Federal Reserve’s unprecedented interest rate hikes, a function of these investment vehicles being highly leveraged so their borrowing costs were increased, a turnaround began last year. As talk of rate cuts increased, culminating in the recent half-percentage point reduction, look for Main Street to grow during the new rate-easing cycle.

Main Street is somewhat unique compared to many of its peers as it pays its dividend monthly. It also pays a special dividend twice a year. The only hiccup it had was during the pandemic when it suspended the special dividend, though it continued making regular dividend payments.

After restarting the special dividend, its combined annual yield is around 8%, making it even more attractive.

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