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What if I told you that you had the opportunity to double your money over the course of 10 years by investing in five different stocks? While it would take a respectable annualized return in excess of 7%, the stock market has returned an average of 8% to 10% throughout its history.
Now what if I claimed you could double your money over the course of 10 years by investing in five high-yield dividend stocks and that your return on investment would double solely from the dividend payments received? Sounds a bit more intriguing, right?
The reality is that this scenario is possible, even if the share price of the underlying stock you purchase remains unchanged over the decade, so long as you reinvest the dividends you receive. By reinvesting your dividends into new shares of a company, you have greater dividend-earning power going forward. In other words, dividend reinvestment opportunities can allow an investor to double their money more quickly than simply pocketing the dividend payment and putting it directly into their bank account.
Today, we'll take a look at five stocks that could actually help you accomplish this goal.
The risks of chasing high yields
However, before I offer up five companies that could help you double your money, a quick word or two on the caveats of high-yield dividend stocks.
Source: Eugene Zemlyanskiy via Flickr
First, keep in mind that dividend yields change inversely with the share price. In other words, a stock's yield could double it its price falls by 50%, but that company may not be particularly attractive if the underlying business is struggling. Investors have to look at the company's overall health and not be dazzled by a high yield. Otherwise, they could buy into a bad investment.
Further, it's important to examine the sustainability of high-yield dividends. You'll occasionally find that high yields are the result of a one-time dividend payment that won't be repeated. Another figure worth keeping an eye on is a company's payout ratio, or the proportion of profits that it's returning to investors in the form of a dividend. Generally speaking, I consider 50%-75% to be the sweet spot, as it leaves room for dividend growth but still ensures that a lion's share of the profit is returned to shareohlders. Any payout ratio above 90% could be a red flag signaling that the company cannot maintain or increase its dividend payments.
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Five high-yield dividends that could double your money in a decade or less
Now that you're well aware of the big risks associated with yield-chasing, let's have a look at five high-yield dividend stocks that have the potential to double your money in a decade or less based solely on their stipend.
For this exercise I assumed that each company's share price, as well as its current dividend growth rate, would remain unchanged over the course of 10 years. Realistically, the odds of that are slim to none, but the emphasis here is on the dividends, not share price appreciation. Considering that the stock market has returned an average of 8%-10% over its history, consider any price appreciation an added bonus..
1. Medallion Financial (MFIN 1.94%): 7.55% trailing 12-month yield
At Medallion Financial's current yield, $10,000 invested in the company with all dividends reinvested would be worth $20,706 after 10 years.
In case the name and ticker symbol weren't a dead giveaway, Medallion Financial acquires taxicab medallions in New York City. These medallions are issued by the city in limited quantities and are extremely expensive (over $1 million per medallion), therefore many cab companies have to borrow money from lenders like Medallion Financial just to obtain the medallions, which are required to operate a taxicab within the city.
The company achieved a jaw-dropping 7.11% net interest margin in the second quarter, up 0.88% from the prior year. By comparison, most money-center lending institutions have net interest margins in the 3%-4% range, demonstrating Medallion's lending power. Though start-ups like Uber remain an external threat, Medallion's future should be bright so long as it retains the majority of New York City's taxicab medallions. .
2. Martin Midstream Partners (MMLP -2.92%): 8.11% trailing 12-month yield
A $10,000 investment in Martin Midstream Partners with all dividends reinvested would be worth $21,180 after 10 years.
Martin Midstream is a master limited partnership primarily engaged in the storage and terminal holdingof oil, natural gas, and natural gas liquids. Due to recent shale finds both on-shore and offshore over the past decade in the U.S., along with the growing demand for fossil fuels, the need to store and transport energy assets is only expected to grow. This is great news for a company like Martin Midstream and places this "energy middleman" in the driver's seat.
It also doesn't hurt that master limited partnerships get certain tax breaks so long as they pass along a good chunk of their profits to shareholders. That's why Martin Midstream boosted its quarterly payout in July for the seventh consecutive quarter.
MMLP Dividend data by YCharts.
3. Annaly Capital Management (NLY 0.61%): 10.61% trailing 12-month yield
A $10,000 investment in Annaly Capital Management with all dividends reinvested would be worth $27,412 after 10 years.
Annaly Capital Management is a mortgage real estate investment trust, or mREIT, and it makes money on the difference between the rate at which it borrows and the rate at which it relends funds. For mREITs like Annaly, lower interest generally mean greater profit for the company. If interest rates rise, as they are widely expected to in 2015, it could squeeze Annaly's net interest margins and profitability somewhat and may lead to a smaller dividend. On the bright side, it looks as if the Federal Reserve will remain gentle with its use of monetary policy tools for years to come.
Also working to Annaly's advantage is the fact that it can leverage its portfolio considerably more than some of its peers because it invests solely in agency-only mortgage-backed securities, which are guaranteed by the U.S. government. In sum, nothing short of a marketwide housing meltdown could wreak havoc on Annaly's MBS portfolio.
4. SeaDrill (SDRL): 11.66% trailing 12-month yield
A $10,000 investment in SeaDrill with all dividends reinvested would be worth $30,128 after 10 years.
West Tucana drilling rig. Source: SeaDrill
SeaDrill is an offshore drilling specialist with one of the youngest fleets in operation, which gives it an automatic leg up on its competitors and compels integrated oil companies to sign longer-term contracts with SeaDrill. In addition, it also helps SeaDrill earn comparably higher dayrates than its peers, which are operating 20- or even 30-year-old rigs, which are far less efficient.
The headwind investors will want to keep an eye on is SeaDrill's $13.6 billion in debt -- buying new rigs isn't a cheap venture. However, so long as oil (a finite resource) maintains its high price point, global energy demand grows, and deep-sea finds remain robust, there's no reason to believe SeaDrill can't continue to pay out its incredible dividend.
5. Chesapeake Granite Wash Trust (CHKR -0.16%): 24.52% trailing 12-month yield
At the current dividend yield, a $10,000 investment in Chesapeake Granite Wash Trust with all dividends reinvested would be worth a staggering $89,617 after 10 years! By comparison, simply pocketing the dividends would leave you with just $34,520 (along with your original investment).
Chesapeake Granite Wash Trust is an oil and gas royalty trust operating out of the Anadarko Basin in western Oklahoma. As Foolish energy specialist Tyler Crowe pointed out in June, royalty trusts are a lot like MLPs, but they come with even better tax perks in that their distributions are taxed as capital gains, and because you're part owner of the wells in a royalty trust's portfolio, you can depreciate your "assets" to lower your cost basis, potentially making you eligible for other tax credits.
Unlike a number of its peers, however, Chesapeake Granite Wash Trust is abundant in natural gas assets, which have lower price points and tend to be more volatile than oil. For investors, it means they could see fluctuations in the quarterly disbursements if natural gas prices dip considerably. Nevertheless, so long as investors keep in mind that royalty trusts only have a finite asset-recovery lifespan (in this case through mid-2031) and that energy demand in the U.S. will likely increase, then they could do pretty well with this incredible yield.
