Morgan Stanley‘s chief executive officer James Gorman was the latest prominent executive to warn of a coming recession, saying at a June 13 financial conference, “It’s possible we go into recession, obviously, probably 50-50 odds now.”
Ultra-high-yield dividend stocks can be a good place to run for cover during turbulent markets. This is because these stocks could beat the broader market and provide steady income to their shareholders in bear markets. Investors with an extra $134,200 in capital lying around to evenly split between these two quality income stocks could generate growing five-figure annual dividend income in the years ahead.
1. Altria Group: A tobacco giant
Having fallen just 6% year to date, tobacco stock Altria Group (NYSE: MO) has fared well so far this year. For context, this is much better than the S&P 500 index’s 24% drop year to date. This largely has to do with the fact that investors have been flocking to high-yield stocks that are perceived to be lower risk.
Altria Group’s 8% dividend yield is nearly five times that of the S&P 500’s 1.7% yield. But don’t be fooled into thinking that the stock’s dividend is unsustainable simply because the yield appears high.
The company’s dividend payout ratio will be around 75% in 2022, which is below its targeted payout ratio of 80%. This builds in a margin of safety for the Dividend King to continue building on its 52-year dividend growth streak in the years ahead.
Altria Group’s relationship with its peer, Philip Morris International, to distribute IQOS in the U.S. looks to be in jeopardy. IQOS is the brand name for Philip Morris’ product that heats tobacco but doesn’t burn it. This is thought to be less harmful than traditional cigarettes.
More promising are its growing volumes for “on!” — that’s the name of its wholly owned oral tobacco nicotine brand. Altria also has a 10% stake in Anheuser-Busch InBev. As a result, analysts anticipate the company can achieve 5.5% annual earnings growth over the next five years. My guess is that this will also lead to mid-single-digit annual dividend increases moving forward.
So even with its recent outperformance, the stock appears to be attractively valued for investors seeking growing passive income. Despite similar growth prospects to its tobacco industry peers, Altria Group’s forward price-to-earnings (P/E) ratio of 9.3 is well below the industry average of 13.9.
A $67,100 investment in the stock would purchase 1,484 shares at the current share price, which would throw off $5,342 in current annualized dividend income.
2. Kinder Morgan: A midstream titan
With 83,000 miles of pipelines and 141 terminals that transport and store natural gas, crude oil, gasoline, and carbon dioxide, Kinder Morgan (NYSE: KMI) is one of the largest midstream companies in North America.
The vast majority of its cash flow is generated by fixed volumes and prices (63%) or fixed prices and variable volumes (25%). As long as Kinder Morgan’s customers remain solvent, the midstream company’s cash flows will remain stable.
The company is most dependent on natural gas storage and transportation, which make up 62% of its business mix. Natural gas is a cheap, reliable, and cleaner alternative to other fossil fuels like coal. As more nations shift away from coal and toward natural gas to meet their economic and environmental objectives, total global consumption of the latter is expected to continue growing through 2040.
The promising forecast for natural gas should help Kinder Morgan to deliver low-single-digit annual distributable cash flow growth over the long run. Since the stock’s dividend payout ratio was a sustainable 45% in 2021, dividend growth should remain around 3% annually well into the future. Given Kinder Morgan’s market-crushing 6.9% dividend yield, this is a respectable amount of potential growth.
A $67,100 investment in the stock would be enough to buy 4,196 shares, which would produce $4,658 in annualized dividend income.
Kody Kester has positions in Altria Group, Kinder Morgan, and Philip Morris International. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Anheuser-Busch InBev NV and Philip Morris International. The Motley Fool has a disclosure policy.