3 High-Yield Dividend Stocks That Generate More Passive Income Than a 10-Year Treasury

The 10-year Treasury yield is hovering around 4%, the highest level in a decade. A higher risk-free rate means that there is an opportunity cost associated with stock investing. While the S&P 500 has historically delivered an average annual return of around 10% (including dividend reinvestments), that average includes years of strong performance, weak performance, and underperformance. Investors seeking a guaranteed 4% return rather than navigating the stock market’s ups and downs are turning to bonds, which is a major reason why stock prices are under pressure.

One way to get the best of both worlds is to stay invested in the stock market while selecting quality high-yield dividend stocks that offer yields above 4%. According to Motley Fool contributors, three high-yield dividend stocks worth considering right now are:

Phillips 66 (NYSE: PSX)

Southern Company (NYSE: SO)

Mativ Holdings (NYSE: MATV)

1. Get a High-Yield Kick with Phillips 66
Scott Levine (Phillips 66): Offering investors a 4.2% forward dividend yield, Phillips 66 is an oil and gas company that owns and operates a diverse set of assets across the energy value chain. The company’s midstream business includes 22,000 miles of pipelines across the U.S., while its chemicals segment produces petrochemicals and plastics across 28 facilities worldwide. On the downstream side, Phillips 66 refines crude oil and other feedstocks at 12 refineries in the U.S. and Europe.

Investors know that a high dividend yield is great, but it means little if a company cannot sustain its dividend payments. Fortunately, that is not a concern for Phillips 66. Management is committed to reinvesting in the business while maintaining financial stability and consistently rewarding shareholders. For instance, during a 2021 Q4 earnings call, CFO Kevin Mitchell stated that 60% of the company’s capital allocation is reinvested into the business, while the remainder is used for dividends and share buybacks.

In January, Phillips 66 demonstrated its commitment to reinvesting in its business by acquiring the outstanding units of DCP Midstream for $3.8 billion in cash. The company expects the acquisition of this natural gas business to generate an incremental EBITDA of $1 billion.

For income and value investors, Phillips 66 is an attractive stock. The stock currently trades at 6.7 times forward earnings, significantly lower than its five-year average of 16.2 times forward earnings—indicating a discounted valuation.

2. A Balanced Utility Stock for Risk-Averse Investors – Southern Company
Daniel Foelber (Southern Company): The utilities sector has been one of the worst-performing sectors in the S&P 500, down 7.8%, with Southern Company stock falling 9.6%. This sell-off has pushed the company’s dividend yield up to 4.2%, slightly higher than the 10-year Treasury yield.

Southern Company is an attractive dividend stock for several reasons:

The company has maintained or increased its dividend for over 70 years, making it a reliable source of passive income regardless of economic conditions or stock market trends.

It serves over 9 million customers in Alabama, Mississippi, and Georgia, providing regulated electricity services, wholesale power, and large-scale nuclear energy projects.

Unlike NextEra Energy and other utility peers, Southern Company has been slower to invest in solar and wind energy. However, it still owns 12.5 gigawatts (GW) of renewable and clean energy assets across 14 states, primarily in California and Texas.

The best way to view Southern Company is as a stable and safe dividend stock. It won’t deliver explosive growth, and it operates more conservatively than some of its peers. But for income-focused investors who prefer a steady utility stock with a balanced energy mix, Southern Company is worth considering.

3. Mativ Holdings Faces a Tough Year but Can Weather the Storm
Lee Samaha (Mativ Holdings): Mativ Holdings was formed in 2022 from the merger of Schweitzer-Maudit and Neenah. The rationale behind the merger was straightforward: Both were relatively small specialty materials and paper companies that aimed to accelerate growth through acquisitions. The goal was to shift revenue away from low-growth markets like tobacco paper and expand into higher-growth industries.

Given this history, it made sense to take mergers and acquisitions a step further by combining the two companies and achieving significant cost synergies. Management expects to generate $65 million in cost synergies, with the company already achieving half of that run rate by mid-2023. During a recent earnings call, CFO Andrew Wamser stated:

"It is reasonable to say that the 2023 full-year consensus EBITDA estimate of nearly $390 million appears achievable."

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a standard measure of profitability. Wall Street’s consensus for 2023 EBITDA is $386 million, with projected earnings per share (EPS) of $2.54—enough to cover the $1.60 per share dividend.

While the financials appear strong, Mativ faces challenges due to slowing demand, as industrial customers are reducing inventory. Many customers built up excess inventory in response to previous supply chain issues, and competitor 3M has already issued a weak outlook for 2023.

Overall, Mativ is facing headwinds in its end markets but benefiting from merger synergies. If the company can navigate these short-term disruptions, investors could benefit from a high-yield stock with strong growth prospects in the years ahead.