Dividend stocks are the foundation upon which great retirement portfolios are built. Over the long run, dividend-paying stocks handily outperform their non-dividend-paying peers, and they offer a host of other advantages.
For example, dividend stocks are usually beacons of profitability, stability, and time-tested business models. Put in another context, there's no reason a board of directors would choose to continue sharing a portion of a company's profits with shareholders if that board didn't foresee continued growth and/or profitability in the future.
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Dividend payouts can also calm investors' nerves during inevitable stock market corrections, as well as be reinvested back into more shares of dividend-paying stock via a dividend reinvestment plan, or Drip). Drips are a strategy money managers commonly employ to compound wealth for their clients over the long term.
These ultra-high-yield stocks pack a punch with reasonable low risk
But targeting income stocks comes with a dilemma as well. We, as investors, want the highest yield with as little risk as possible. Yet statistical data shows that risk and yield tend to be correlated. That means ultra-high-yield stocks tend to be the riskiest investments of them all.
But if you're willing to dig deep enough, you can uncover a basket of diversified ultra-high-yield dividend stocks that could actually outperform the historic average annual return of the stock market of 7% (inclusive of dividends paid and adjusted for inflation). The following basket of five ultra-high-yield companies currently sports an average annual yield of 9.8%, which would lead to a doubling of your invested capital (assuming static share prices) in just over seven years.
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Alliance Resource Partners: 10.4% dividend yield
Generally speaking, coal is an industry most folks avoid given its reduced emphasis in the U.S. energy market, the rise of renewable energy choices, weaker oil prices, and the fact that most coal companies drowned themselves in debt in the late 2000s. None of these concerns is really a problem for Alliance Resource Partners (ARLP 1.95%).
Alliance Resource Partners' net debt of $469 million in much lower than its peers, and it's not much of a concern with $694 million in operating cash flow generated over the trailing 12-month period.
More so, this is a company that tends to reduce its operating cash flow uncertainty by focusing on securing volume and price commitments well in advance. With approximately 44 million tons of coal expected to be produced in 2019, the company already has 36.8 million tons committed at a specific price, with another 18 million locked in for 2020. These future commitments mean minimal exposure to what can be a volatile wholesale coal market.
Lastly, Alliance Resource Partners has really picked up its export game. Having recognized just a mid-single-digit percentage in total sales from exports in 2016, roughly a quarter of the company's sales in 2018 came from exports to overseas markets. Countries like China and India are still hungry for electricity generation, and these represent perfect targets for Alliance Resource Partners.
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AT&T: 6.6% dividend yield
Laughably, telecom giant AT&T (T 1.27%) is the only one of the five ultra-high-yield stocks mentioned here not to have a double-digit yield. But among the highest-yielding large-cap stocks, it's an income king. If you have any concerns about this company's dividend being sustainable, you can put those worries to bed. Over the past five years, AT&T has averaged $37 billion in annual operating cash flow, which is more than enough to support its bountiful payout.
Traditionally a slow-growing company, AT&T appears ready for an organic growth infusion. The nationwide rollout of 5G networks is under way, which should lead to another multiyear smartphone upgrade cycle targeted at higher data usage and streaming. Not only does this benefit AT&T's data-driven, high-margin wireless business, but it's a boon for the company's video content services.
AT&T also has an opportunity to shine now that its Time Warner deal has closed. Although the initial reaction from investors hasn't been great, Time Warner's prized assets (CNN, TBS, and TNT) are a dangling carrot to draw new users to AT&T's streaming services, as well as give AT&T more clout when charging advertisers.
With the company's forward price-to-earnings ratio at close to a decade low, you'd struggle to find a more attractive large-cap income stock.
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Annaly Capital Management: 11.7% dividend yield
Speaking of high-yield dividend stocks, no company in this basket tops mortgage real estate investment trust (REIT) Annaly Capital Management (NLY +0.76%) and its 11.7% yield.
The thesis with mortgage-REITs is simple: They buy assets (e.g., mortgage-backed securities) that have a long-term yield, and borrow money to buy these assets (often times levering up in the process) at a short-term rate. The difference between the short-term rate and long-term yield is their net interest margin. The wider this gap, the more money mortgage-REITs make.
Mortgage REIT assets typically fall into one of two categories: agency and non-agency. Agency loans are backed by the federal government in case of default, whereas non-agency loans aren't. Of course, more risk means higher return potential, thus non-agency loans have higher long-term yields than agency loans. In Annaly's case, it's focusing almost entirely on the safe agency mortgage-backed securities and levering up to make the most of its profits.
Generally, mortgage REITs perform poorly in rising interest rate environments since it tends to shrink their net interest margin. But this fear may be overblown in Annaly Capital Management's case. With a long-tenured management team, and the Fed walking rates up very slowly and methodically, it's allowed the company to optimally adjust its investment portfolio over the last three years. In other words, this ultra-high-yield isn't nearly as risky as you'd think.
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CNX Midstream Partners: 10.1% dividend yield
Another double-digit yield that should cause income investors to drool with excitement is small-cap CNX Midstream Partners (CNXM +0.00%). Located in the Appalachian Basin in Pennsylvania and West Virginia, CNX Midstream develops and acquires gathering pipelines, dehydration facilities, and condensate facilities (to name a few of its assets) for the natural gas industry.
Similar to Alliance Resources in how it mitigates cash flow risk, CNX Midstream's beauty is leaning on fee-based services. In doing so, the company removes a lot of the wholesale pricing risks that has existed with natural gas in recent months. This leads to predictable cash flow, which in turn allows management to outlay higher quarterly distributions and increase capital expenditures without a lot of near-term risk. In 2018, CNX Midstream's distribution coverage ratio was 1.39 times what was declared, so there are no concerns of its payout being unsustainable.
And speaking of outlays, CNX Midstream Partners' fourth-quarter report and 2019 guidance foretold a big uptick in capital expenditures. With capital investments of $137.1 million in 2018, the company expects to spend between $250 million and $280 million on projects in 2019, all while maintaining a similar distribution coverage and growing at a 15% clip, on average, over the next five years. That makes this 10%-plus dividend stock one you should be watching, and possibly owning.
Check out the latest earnings call transcripts for Alliance Resource Partners and other companies we cover.
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Mobile TeleSystems: 10.1% dividend yield
Last, but not least, consider Russian telecom services giant Mobile TeleSystems (MBT +0.00%), which is sporting a dividend yield of just over 10%.
One of the biggest knocks investors have traditionally had about Mobile TeleSystems is Russia's ridiculously high wireless subscription penetration rates. In essence, there are worries about future growth given that so many Russian consumers already have a wireless plan. But what's often overlooked is the ongoing rollout of LTE and next-generation networks outside of Russia's major cities. Just as AT&T is set to experience a data resurgence, Mobile TeleSystems should benefit from an ongoing upgrade cycle.
This is also a company that's branching out beyond just telecom services. Last year, Mobile TeleSystems consolidated its stake in MTS Bank that helps to streamline interactions between the two companies. For instance, Mobile TeleSystems finds that markets with high data penetration rates are often accompanied by higher mobile-based financial service usage by consumers. Mobile TeleSystem's push into the cloud services market and even telemedicine, are all examples of the company trying to create an ecosystem beyond telecom services to keep consumers engaged within the company's sphere of influence.
At less than eight times next year's projected earnings per share, this is one foreign telecom company that should be on your radar.
