This may well go down as the weirdest holiday season we've ever experienced. The unprecedented coronavirus disease 2019 (COVID-19) pandemic has completely upended societal norms and transformed the traditional work environment.
However, none of this changes the fact that it's the season of giving – and no companies have historically given more to investors than dividend stocks.
In 2013, J.P. Morgan Asset Management released a report that compared the annualized return of public companies that initiated and raised their payouts between 1972 and 2012 to public companies that didn't pay a dividend over the same time frame. The result was a 9.5% annualized return for dividend-paying stocks, which was nearly six times higher than the 1.6% annualized return for companies with no dividend.
However, not all dividend stocks are created equal. In an ideal world, income investors would prefer the highest yield possible with the least amount of risk. In reality, risk and yield tend to correlate. This means ultra-high-yield dividend stocks (i.e., those with yields of at least 8%) are often risky. Since yield is a function of payout relative to share price, a struggling business with a plunging share price can lure income investors in with a high yield and trap them.
Here's the good news: Not all ultra-high-yield stocks are bad.
If you're looking to pad your pocketbook in a big way without taking on an inordinate amount of risk, the following three ultra-high-yield dividend stocks are perfect for your portfolio.
Annaly Capital Management: 10.5% yield
There may not be a more boring industry than mortgage real estate investment trusts (REITs). Then again, there aren't too many industries I'm more confident will outperform over the next three to four years than mortgage REITs like Annaly Capital Management (NLY -0.51%).
In simple terms, mortgage REITs borrow money at short-term lending rates and acquire assets with a higher long-term yield. In Annaly's case, it's primarily acquiring mortgage-backed securities (MBS). The perfect scenario for Annaly involves a steepening of the yield curve. Historically, economic recoveries are often accompanied by a multiyear steepening of the yield curve, which suggests Annaly is entering the sweet spot where its net interest margins will widen considerably.
Also working in Annaly's favor is the company's focus on agency assets. Agency MBSs are backed by the federal government in case of default. Though the yields tied to agency assets are lower than non-agency assets, the protection provided by the federal government is what allows Annaly to use leverage to its advantage.
Currently yielding north of 10%, it would not be surprising to see Annaly maintain a low double-digit yield for at least the next five years, if not longer.
Mobile TeleSystems: 8.9%
Another absolute moneymaker for patient investors is Russian telecom giant Mobile TeleSystems (MBT), which is also known as MTS.
MTS' main growth driver has long been its wireless segment. Though wireless saturation in Russia is already incredibly high, infrastructure upgrades provide a multiyear opportunity for the company to deliver mid-single-digit sales growth and improved operating cash flow. After all, data is where MTS is going to generate the bulk of its wireless margin, and consumers are likely to upgrade their devices over the coming years to take advantage of faster download speeds.
However, it's not just wireless that'll be packing a punch for Mobile TeleSystems. The company has expanded its operations in recent years to include banking and fintech solutions, cloud computing, and television subscriptions. In the most recently ended quarter, MTS had at least 6 million users using two or more of its services, such as telecom, fintech, and media, with paid TV users increasing by 1.1 million from the prior-year period. The point is, Mobile TeleSystems is effectively developing an ecosystem to foster more robust long-term growth.
Although MTS doesn't pay a set dividend, it's been doling out two payouts annually for years. Having averaged a yield of closer to 10% since 2015, MTS looks like a good bet to continue rewarding income investors.
ExxonMobil: 8.1% yield
As you might imagine, the COVID-19 pandemic has done quite a number on one of the world's largest energy companies. Crude demand fell off a cliff during the spring as developed countries entered lockdowns to slow the spread of the illness. This, in turn, sent ExxonMobil's share price to levels not seen in nearly two decades. The good news is that ExxonMobil has levers it can pull to improve its financial situation and long-term growth outlook.
For example, the company initially planned to spend up to $33 billion on projects in 2020. But facing the sharpest downturn in crude demand in decades, it chose to pare back its spending by $10 billion to $23 billion. Next year should feature capital expenditures of between $16 billion and $19 billion, which will mark about a 15-year low. Yet even with reduced spending, ExxonMobil is moving forward with its Payara project off the coast of Guyana, which should add 220,000 barrels of oil production per day by mid-decade. In short, these cost cuts don't mean ExxonMobil is sacrificing long-term growth potential.
Similar to Annaly, the rebound in the U.S. economy should also bode positively for the price of crude worldwide. As crude prices rebound, ExxonMobil's operating cash flow will begin pointing higher, once again.