Over the last four weeks, Wall Street has bluntly reminded investors that stocks can go down, too.
When the closing bell tolled on August 2, the growth stock-fueled Nasdaq Composite (^IXIC) had officially entered correction territory, with a decline that exceeded 10% from its all-time high, set on July 10. The fireworks really kicked off on Monday, August 5, with the Nasdaq briefly shedding in excess of 1,000 points at the open and ending the day lower by 576 points.
Although this was “only” a 3.43% move lower, the 576-point decline slots in as the eighth-largest nominal-point drop in the index’s history.
Over the span of three trading sessions, from Aug. 1 through Aug. 5, the Nasdaq Composite lost nearly 1,400 points, or about 8% of its value. In other words, the index most responsible for leading the broader market higher is now in turmoil.
The silver lining for long-term investors is that turmoil begets opportunity. Even without knowing how long this heightened volatility will last or where the ultimate bottom will be for the Nasdaq Composite, history tells us that buying stakes in time-tested businesses with competitive advantages during sell-offs, and holding those companies for extended periods, offers a high probability of success.
On Wall Street, few investment strategies have been as fruitful as buying and holding top-notch dividend stocks over the long run.
According to a report released last year by the investment advisors at Hartford Funds, dividend stocks have more than doubled the average annual return of non-payers over the last half-century — 9.17% vs. 4.27%. What’s more, income stocks have achieved this outperformance while being 6% less volatile than the benchmark S&P 500. This makes dividend stocks an ideal buy candidate during periods of turmoil for Wall Street’s leading indexes.
With the Nasdaq contending with a historic sell-off, the following three high-yield dividend stocks make for screaming buys.
Realty Income: 5.32% yield
The first supercharged dividend stock that makes for a no-brainer buy during the Nasdaq’s historic sell-off is the premier name among retail real estate investment trusts (REITs), Realty Income (O). Realty Income parses out its dividend on a monthly basis and has increased its payout for an astonishing 107 consecutive quarters.
One of the reasons investors can confidently trust Realty Income to deliver, even during turbulent periods on Wall Street, is its vast commercial real estate (CRE) portfolio. As of June 30, it owned or held interests in 15,450 CRE properties, approximately 90% of which were considered resilient to economic downturns and various e-commerce pressures.
More specifically, Realty Income’s retail portfolio is focused on stand-alone businesses that provide basic need goods and services. For example, grocery stores, convenience stores, dollar stores, home improvement stores, drug stores, and automotive service locations collectively accounted for almost 42% of the company’s annualized contractual rent during the March-ended quarter. Leasing to businesses that draw in customers in any economic climate means few, if any, concerns about not getting paid rent on time.
To build on this point, Realty Income hasn’t had issues hanging onto its renters. It closed out the June quarter with only 185 properties available for lease or sale, which works out to an above-industry-average occupancy rate of 98.8%!
In addition to its highly successful retail-focused CRE portfolio, Realty Income has been expanding into new verticals. It’s completed two deals in the gaming industry over the last two years, acquired Spirit Realty Capital earlier this year, and has forged a joint venture with Digital Realty Trust to lease build-to-suit data centers.
Despite decades of operating outperformance, Realty Income is currently valued at only 13.1 times Wall Street’s consensus cash flow estimate for 2025. This represents a 23% discount to its average multiple to cash flow over the last five years, which is what makes it such a screaming buy right now.
Sirius XM Holdings: 3.53% yield
A second high-yield dividend stock that makes for a surefire buy with the Nasdaq Composite in turmoil is satellite-radio operator Sirius XM Holdings (SIRI). Due to the poor performance of Sirius XM’s shares in 2024, the company’s yield has surged above 3.5%.
The prevailing concern for Sirius XM over the next couple of quarters is weakness in the auto industry. Sirius XM relies on promotional users transitioning into self-pay subscribers — new vehicle buyers are sometimes given a three-month promotional subscription to Sirius XM’s satellite services. If the U.S. economy dips into a recession, or consumer sentiment weakens, we’re liable to see new vehicle sales slow. This would be expected to adversely impact the number of self-pay subscriber additions.
Despite total subscriptions retracing modestly in back-to-back quarters, Sirius XM Holdings offers competitive edges that simply can’t be found with most radio operators.
The key differentiating factor with Sirius XM is its revenue generation. The traditional radio industry, including most online radio providers, rely almost exclusively on advertising to keep the lights on. This strategy works well until ad spending dries up during a recession. Less than 20% of Sirius XM’s net sales can be traced back to ads through the first-half of the year.
By comparison, 77% of the company’s net sales through the first six months of 2024 came from subscriptions. The company’s subscribers are far less likely to cancel their service during challenging times than businesses are to meaningfully pare back their marketing. In other words, Sirius XM’s operating cash flow should be stabler than traditional radio providers.
It’s also the only licensed satellite-radio provider. Even though it still faces competition for listeners from terrestrial and online radio, being a legal monopoly affords Sirius XM the ability to increase its subscription prices with little fuss.
Sirius XM’s forward price-to-earnings (P/E) ratio of a little over 9 is a whopping 48% below its average forward-year multiple over the trailing-five-year period. Once again, a clear screaming buy.
Enterprise Products Partners: 7.53% yield
The third high-yield dividend stock that makes for a screaming buy given this historic sell-off we’ve witnessed in the Nasdaq Composite over the last week is energy goliath Enterprise Products Partners (EPD). Enterprise has raised its payout for 26 consecutive years and is currently doling out an S&P 500-crushing 7.5% yield.
Admittedly, some investors are going to be leery about putting their money to work in oil and gas stocks given how volatile the spot price of energy commodities can be during periods of turmoil on Wall Street. What gives Enterprise Products Partners an edge is its role in the energy complex.
Although drilling companies are highly dependent on the spot price of crude oil and natural gas, Enterprise’s not-so-subtle secret is that it’s an energy middleman. Instead of drilling, it’s responsible for more than 50,000 miles of transmission pipeline, over two dozen fractionation facilities, and can store north of 300 million barrels of liquids.
What makes Enterprise Products Partners such a desired investment among midstream companies is the structure of its contracts with upstream drillers. It prominently relies on long-term, fixed-fee contracts. The “fixed-fee” nature of these deals ensures that spot price volatility is removed from the equation, thusly allowing Enterprise’s management team to accurately forecast cash flow a year or more in advance.
It can’t be overstated enough how important it is for midstream energy companies to be able to accurately predict their upcoming cash flow. It’s what’s given Enterprise’s management team the confidence to approve $6.7 billion in major projects, much of which is focused on bolstering its natural gas liquids operations.
Best of all, roughly three years of significantly reduced capital expenditures by energy majors during the COVID-19 pandemic has led to tight global crude oil supply. As long as supply remains constrained, and the spot price of crude oil is above its historic norm, domestic drillers are going to be incented to increase production. This means even more opportunity for Enterprise Products Partners to land lucrative long-term deals.
At 9.7 times forward-year earnings, Enterprise is valued at a 6% discount to its average forward-year multiple over the last five years. It’s quite the deal when a 7.5% dividend yield is also involved.
— Sean Williams
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Source: The Motley Fool