When the curtain closes on 2020, there's no doubt it'll go down as one of the most challenging years on record for Wall Street and investors.
The coronavirus disease 2019 (COVID-19) pandemic has adversely impacted most sectors and industries, pushed the U.S. unemployment rate up to Great Depression levels, and led to the highest volatility readings ever for equities, as measured by the CBOE Volatility Index. In other words, it's tested the resolve of investors (even long-term investors) like few events before it.
Image source: Getty Images.
Not all dividend stocks are created equally
If this panic and volatility has done anything, it's made the case even stronger for investors own dividend stocks. For one, dividend stocks have historically run circles around non-dividend-paying companies. An analysis from Bank of America/Merrill Lynch found that companies initiating and growing their payouts between 1972 and 2012 returned an average of 9.5% per year. This compares to average annual returns of just 1.6% for non-dividend-paying stocks.
Additionally, dividend stocks are often profitable and time-tested businesses models with transparent outlooks. These are the types of stocks that investors can hang onto for long periods of time and not lose sleep over.
Yet, there's also a dark side to dividend investing. Generally, the higher yield, the more risk involved for investors. Since yield is merely a function of payout relative to share price, a struggling business with a tanking share price can trick income seekers into buying a yield trap. This means that high-yield stocks (those with yields of at least 4%) deserve a lot of extra scrutiny.
But what if I told you that there are three ultra-high-yield dividend stocks that you can safely buy right now that'll pay 8% (or more) per year? And, what if I said that you don't need a fortune to make one with these ultra-high-yield stocks? If you have even $2,000 in disposable cash that won't be needed to pay bills or cover emergencies, then you have more than enough capital to buy into these yield monsters.
Image source: Getty Images.
Annaly Capital Management: 12.3% yield
A quick look at mortgage real estate investment trust (REIT) Annaly Capital Management's (NLY 1.02%) 10-year chart probably won't inspire much confidence in this first pick. Annaly's share price has been more than halved over the trailing decade, and the company recently announced a 12% cut to its quarterly dividend (from $0.25/quarter to $0.22/quarter). Based on this, you'd think I was talking about one of those aforementioned yield traps.
But I assure you that this isn't the case. Despite its recent struggles, Annaly Capital Management has the tools needed to deliver substantial income and share price appreciation for investors over the next five to 10 years.
As with other mortgage REITs, Annaly's goal is to borrow money at short-term rates, then acquire assets (e.g., mortgage-backed securities (MBS)) that provide a higher long-term yield. This allows the company to pocket the different in yield (known as net interest margin) as profit. And since it's a REIT, Annaly avoids normal corporate income-tax rates in exchange for disbursing most of this profit to shareholders in the form of a dividend. This is why its average annual yield over the past two decades has been about 10%.
The concern with Annaly has been twofold. We witnessed a very brief yield-curve inversion in 2019 that saw longer-term bond yields fall below short-term bond yields. That's not good news for companies reliant on net interest margin. And secondly, there's worry about the mortgage market due to the pandemic.
Now, for the good news. Economic recoveries have historically featured a multiyear expansion of the yield gap between short-and-long-term yields. Also, Annaly's MBS portfolio is almost entirely focused on agency-only assets. By agency-only, I'm referring to assets backed by government agencies in case of default. Though the yields on agency-only assets are lower than non-agency assets, it allows Annaly to safely use leverage to its advantage. Suffice it to say, the current environment is perfect for Annaly Capital Management to succeed.
Image source: Getty Images.
Mobile TeleSystems: 9.6% yield
Another industry where you'll consistently find ultra-high-yielding stocks is telecom. That's because the growth heyday for most telecom companies is in the rearview mirror, which incentivizes public wireless providers to pay a handsome dividend to their shareholders.
One foreign company in the telecom space that you should seriously consider buying is Russia's Mobile TeleSystems (MBT). Excluding a one-time special dividend, MTS, as the company is often known, has a trailing 12-month yield of nearly 10%.
Why isn't MTS getting any respect in spite of an almost 10% yield and a forward price-to-earnings ratio of less than 9? For one, you can blame Russia's wireless saturation. With most folks in Russia already owning a smartphone or two, demand for new accounts isn't nearly as robust as it once was.
Additionally, there's the simple concern of operating in Russia. Over the past quarter of a century, there have been two separate instances where Russia's ruble tanked. Geopolitical concerns are always something for investors to keep in mind.
The good news, though, is Mobile TeleSystems should be a big-time beneficiary of the rollout of 5G networks. Since Russia is a gigantic country, MTS isn't going to complete these infrastructure upgrades overnight. Instead, we're likely to see a steady progression of technology upgrades for wireless devices throughout the country (first in major cities, then in the suburbs). This should lead to a multiyear uptick in organic growth spurred by higher data consumption.
Furthermore, MTS has expanded its operations well beyond telecom. It now holds almost a 100% stake in MTS Bank, and in 2019 acquired a cloud service provider in Russia. As a conglomerate, Mobile TeleSystems will have new channels to generate growth this decade, as well as ensure that income investors are well taken care of.
Image source: Getty Images.
ExxonMobil: 8% yield
Lastly, there's a name that most investors are probably a bit more familiar with: integrated oil and gas giant ExxonMobil (XOM -2.78%).
ExxonMobil, and really all oil stocks for that matter, have had a terrible year. The COVID-19 pandemic completely pulled the rug out from beneath the industry, briefly sending West Texas Intermediate crude into negative territory for the first time ever. Oil stocks have been mostly scrambling to cut costs ever since, with a number of U.S. shale operators going belly up.
Oil and gas may not seem like a great investment given the push toward renewable energy generation via solar and wind, but there's little doubt that fossil fuels are here to stay for decades to come. That means ExxonMobil's size should come in handy.
As noted, this is an integrated company. Even though drilling and exploration are where the juiciest margins lie, ExxonMobil is able to lean on other aspects of its business when crude prices are weak. More specifically, its downstream refining and petrochemical operations can become cash cows that help to partially offset drilling segment weakness. These downstream components benefit from lower input costs and presumed higher consumer/enterprise demand when crude prices fall.
ExxonMobil also has levers that the company can pull in the expenditure department. Before the COVID-19 pandemic began wreaking havoc on the U.S., ExxonMobil had been planning to spend $30 billion to $33 billion on CapEx in 2020. Following this disruption, it was able to reduce its planned spending by a cool $10 billion. Currently riding a 37-year streak of increasing its payout, ExxonMobil's management will do whatever is necessary to protect its placement among other Dividend Aristocrats.
