Growth stocks might be getting all the hype of late, but it's dividend stocks that have historically done a lot of the market's heavy lifting.
Back in 2013, J.P. Morgan Asset Management released a report that compared the performance of companies that initiated a dividend and grew their payout to non-dividend-paying stocks over a four-decade span (1972-2012). The dividend stocks averaged an annualized gain of 9.5% over the analyzed time frame. Meanwhile, public companies that didn't pay a dividend clawed their way to a meager annualized gain of 1.6% over four decades. All told, dividend stocks delivered an aggregate 19-fold outperformance relative to non-dividend stocks.
This data really shouldn't surprise anyone. Businesses that pay a dividend are almost always profitable, usually have clear long-term outlooks, and have time-tested operating models that have survived one or more considerable swoons in the U.S. or global economy. In other words, they're beacons of success for investors.
But not all dividend stocks are created equal. Ideally, income seekers want the highest yield possible with the least amount of risk. Unfortunately, once you hit the high-yield mark of 4%, risk and yield tend to be correlated. This is to say that the higher the yield, often the lower the real return. That's because yield is simply a function of payout relative to price. A company with a struggling or failing operating model could trap unsuspecting investors with a high yield as a result of a falling share price.
Despite this cautionary tale, not all ultra-high-yield stocks -- those with yields of at least 8% -- are avoidable. In fact, three sport rock-solid payouts that should help investors trounce inflation worries and generate some serious income.
Annaly Capital Management: 9.9% yield
One stock investors have come to count on for a double-digit yield over the vast majority of the past two decades is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY -0.51%). The current 9.9% yield is a three-year low, but it still runs absolute circles around the current inflation rate.
Without getting too technical, mortgage REITs like Annaly borrow money at short-term lending rates and purchase assets, such as mortgage-backed securities (MBSs), that offer a higher long-term yield. The difference between this higher long-term yield and the lower short-term borrowing rate is known as the net interest margin (NIM). The wider the NIM, the more money Annaly and mortgage REITs are bringing in.
Right now, things couldn't be better for mortgage REITs. The yield curve has begun steepening, which is common during the early stages of an economic recovery. Usually, mortgage REITs see their NIMs widen as the yield curve steepens.
What's more, Annaly Capital Management almost exclusively purchases agency securities. This is a fancy way of saying that the assets Annaly is buying are backed by the federal government in the event of a default. Although having this protection means it generates lower yields on the MBSs it buys, it also allows Annaly to use leverage to its advantage to pump up its income. Nothing short of historic yield volatility hurts this operating model.
Mobile TeleSystems: 9.6% yield
Another ultra-high-yield dividend stock that investors can continue to count on for a long time to come is Russian telecom giant Mobile TeleSystems (MBT). The company, which is also known as MTS, has consistently delivered a yield ranging between 7% and 14% for more than six years.
The primary revenue generator for MTS is its wireless operations. Even though this is a generally slow-growth segment, the rollout of new infrastructure bodes well for the company's organic growth prospects. The introduction of 5G wireless infrastructure in major cities in Russia, as well as the ongoing buildout of 4G technology into more rural areas, offers multiyear technology upgrade opportunities at the consumer and enterprise level. Remember, data is the primary driver here, so faster download speeds should lead to more high-margin opportunities for MTS' mobile operations.
What's really intriguing about this company is what it's doing beyond connectivity. In addition to telecom services, MTS offers banking operations, paid TV services, and cloud services, among other new operating segments. According to the company's 2020 full-year report, it ended with nearly 2.5 million MTS Bank clients, 6.6 million paying TV users (up 44% year over year), and approximately 7 million people utilizing two or more of its services, including telecom, fintech, and media. Though these new segments aren't generating much in the way of revenue, they offer superior long-term growth prospects.
With the exception of a serious deterioration in the Russian ruble, Mobile TeleSystems' dividend is rock-solid and can be counted on by income-seeking investors.
AGNC Investment Corp.: 8.2% yield
Have I mentioned that mortgage REITs are a really smart place to pack on dividend income during the early stages of an economic rebound? If Annaly is the Batman of the mortgage REIT industry, AGNC Investment Corp. (AGNC -0.66%) is most certainly Robin.
The premise here is exactly the same: AGNC is seeking to borrow money at short-term rates and use that capital to purchase long-term assets with a considerably higher yield. It's worth noting that between March 31, 2020, and Dec. 31, 2020, AGNC's average net interest spread widened from 1.3% to 2.02%. This 72-basis-point swing might not sound like much, but with the company using nearly nine times leverage, it can really pump up operating income. Note that nine times leverage is within historic norms for the company.
Similar to Annaly, AGNC is all about purchasing agency assets. Of the $97.9 billion in fair-valued assets in its portfolio, as of Dec. 31, 2020, $96.6 billion were fixed-rate residential MBSs or to-be-announced agency securities. Only $188 million were some form of adjustable-rate non-agency residential MBS. In plainer terms, we're talking about a company producing very predictable cash flow more often than not.
Best of all, AGNC Investment parses out its dividend of $0.12 on a monthly basis. At no point since its initial public offering in 2009 has AGNC's payout dipped below 8%, making it the perfect stock to trounce inflation.