The past two months have undoubtedly been challenging for investors. The uncertainties created by the spread of the coronavirus disease 2019 (COVID-19) wound up knocking more than 20% off the benchmark S&P 500 in 17 trading sessions, and led to a greater than 30% loss in a mere 22 sessions (about one month). Both figures represent the fastest 20% and 30% declines from a recent high in history.
However, history has proved kind to long-term investors who purchase stocks during periods of correction. That's because all corrections in the stock market are eventually erased by a bull market rally. In fact, no rolling 20-year period in the S&P 500 has yielded a negative average annual return, inclusive of dividends. Thus, opportunistic investors who choose to buy during periods of fear and weakness tend to come out ahead in the long run.
The question, of course, is what to buy?
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Here's why high-yield dividend stocks are your ticket to big gains
While there's no shortage of discounted companies following the coronavirus pandemic crash, dividend stocks likely give investors the best chance to make money over the long term. Aside from being profitable and time-tested, dividend stocks have also, historically, run circles around their nondividend-paying competition.
According to a 2013 report from J.P. Morgan Asset Management, publicly traded companies that initiated and grew their payouts between 1972 and 2012 averaged an annual return of 9.5% over this 40-year period. By comparison, nondividend-paying companies averaged only a 1.6% annual return over this same time frame.
Ideally, investors want the highest yield with as little risk as possible. Unfortunately, risk and yield tend to be somewhat correlated, which can make high-yield stocks risky. However, the following high-yield stocks -- i.e., those with yields of at least 4%, or double that of the S&P 500 -- appear to have what it takes to deliver for their investors over the long term. If you have even $2,000 in disposable cash that you can spare for investment purposes right now, then you should seriously consider putting it to work in these three high-yield dividend stocks.
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AT&T: 6.9% yield
Sometimes the absolute best stocks you can buy are those with business models that would otherwise be described as boring. Telecom giant AT&T (T 1.88%) certainly fits the bill, albeit with a nearly 7% dividend yield in tow. At this yield, investors will double their money in just over a decade based on the payout alone.
Although AT&T's rapid growth days are long gone, there are reasons to believe that the company's organic growth rate and cash flow are about to pick up. For one, it's in the midst of upgrading its wireless infrastructure to next-generation 5G networks. This rollout isn't going to happen overnight, nor will it be cheap. However, the rewards should be worth it, with a multiyear technology upgrade cycle liable to result in higher data usage. Since data is where AT&T generates the bulk of its margins, 5G should help jump-start growth for the company.
AT&T is also making waves with its streaming options. While cord-cutting remains a problem with its DirecTV operations, the upcoming launch of its HBO Max streaming service, coupled with using its Time Warner assets (CNN, TNT, and TBS) as a lure -- AT&T acquired Time Warner in 2018 -- should help the company attract more streaming users.
At approximately eight times Wall Street's profit consensus for next year, AT&T is cheaper than it's been in a long time.
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Innovative Industrial Properties: 5.5% yield
Then again, not all high-yield stocks have to be boring. Take cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR 0.06%) as a perfect example. IIP, as the company is more commonly known, acquires cultivation and processing sites in exchange for cash then leases these assets out for an extended period of time, thereby reaping the rewards of rental income. Since the REIT model is generally low cost, IIP's cash flow thus becomes highly predictable.
Also working in Innovative Industrial Properties' favor is the fact that traditional financing options for U.S. multistate operators (MSO) has been limited. This is to say that since marijuana is illegal at the federal level, banks and credit unions are leery about lending to multistate pot companies. IIP leans on sale-leaseback agreements as a solution. MSOs sell assets to IIP in exchange for cash, with IIP leasing the same property right back to the MSO, locking in a long-term tenant. Since neither President Trump nor Democratic Party contender Joe Biden is open to the idea of legalizing marijuana, IIP should hold its competitive financing advantage for a while.
Innovative Industrial Properties currently owns 54 properties in 15 states, with 99.1% of its square footage currently leased. The weighed-average length of these leases is 16.1 years, with an average return on invested assets of around 13.2%. This means IIP should net a complete payback on its invested assets in roughly 5.5 years, with everything else being gravy.
Although IIP can be volatile at times, long-term investors with $2,000 to put to work shouldn't be disappointed.
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IBM: 5.3% yield
Even though IBM (IBM 1.05%) has had the look of a stale tech stock throughout much of the past decade, it appears to finally be turning the corner in its efforts to shift its business focus. That places its generous capital return policy and 5.3% dividend yield squarely in focus for high-yield income seekers.
IBM's biggest issue is that it waited far too long to shift its focus toward cloud computing. As a result, declining legacy sales have weighed on its top-line figures for years. But the acquisition of Red Hat last year, coupled with organic cloud sales expansion, should help IBM reverse this trend. Between 2013 and 2019, IBM increased its cloud revenue from 4% of total revenue to 27% of total sales. Expect this figure, and its operating cash flow, to continue climbing for the foreseeable future.
What's more, IBM has done an impressive job of controlling its costs. Since closing the Red Hat acquisition, the company has managed to reduce its debt by $10 billion. Furthermore, despite declining legacy sales, mindful cost cuts have allowed the margins on these legacy segments to expand from the previous year. Thus, even though IBM's sales growth has been relatively flat, we should see healthy cash flow and net operating income expansion in 2020 and beyond.
IBM has successfully reinvented itself before, and it looks to be on the cusp of doing so, once again.
