For more than a decade, growth stocks have dominated the headlines. That's because historically low lending rates, a dovish central bank, and more recently a free-spending federal government, have created a perfect storm for fast-growing companies.
But if you pan out and examine the very long-term performance of the stock market, you'll find that dividend stocks are the true outperformers.
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Dividend stocks have historically run circles around non-dividend-paying companies
Back in 2013, J.P. Morgan Asset Management released a report that compared the average annual returns of publicly traded companies that initiated and grew their dividend between 1972 and 2012 to stocks that didn't pay a dividend over the same time frame. The result? Dividend-paying stocks averaged an annual return of 9.5% over four decades, which compared to a meager 1.6% average annual return for the non-dividend payers.
This huge gap in performance typically flies under the radar, but it shouldn't come as a surprise. Dividend stocks are often consistently profitable, have time-tested operating models, and generally have clear outlooks that allow management to continue sharing a percentage of profits with investors.
Dividend stocks are often the secret sauce behind some of the top retirement portfolios. For example, Berkshire Hathaway CEO Warren Buffett is a big fan of companies that pay dividends. This year alone, his company is slated to collect more than $4.3 billion in dividend income, with a trio of holdings accounting for roughly half this amount. Although Buffett isn't reinvesting the payouts Berkshire Hathaway is receiving, investors could choose to do so and would almost certainly pump up their wealth-creating potential.
If you have $3,000 in cash at the ready, which won't be needed to cover bills or emergencies, that's more than enough to buy the following trio of top-notch dividend stocks, all of which could easily double your money.
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Annaly Capital Management
First up is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY -0.32%). Though mortgage REITs have generally been shunned by Wall Street for the better part of a decade, they're about to hit the sweet spot of their growth cycle.
Without getting overly complicated, Annaly Capital Management seeks to borrow money at low short-term rates to purchase assets (mortgage-backed securities) with higher long-term yields. This gap between the higher long-term yield and short-term borrowing rate is known as the net interest margin (NIM). The wider the NIM, the more money Annaly makes. And the more Annaly makes from its operations, the more it pays out to shareholders as a REIT.
What makes Annaly so intriguing is the yield curve. Generally, the yield curve steepens during the early years of an economic recovery. This is to say that long-term Treasury yields rise while shorter-term bond yields stay flat or decline. For mortgage REITs, a steepening yield curve often leads to a widening of their NIM.
Something else to recognize about Annaly is that it almost exclusively purchases agency securities. In layman's terms, this means it's buying assets protected by the federal government in the event of a default. This protection has its ups and downs. On the downside, the yields on agency assets are considerably lower than the riskier non-agency securities. But on the bright side, Annaly can use leverage to pump up its profit potential, even with lower long-term yields.
For roughly two decades, Annaly has averaged an annual yield of around 10%. Couple this with the expectation of a wider NIM, and Annaly should easily be able to double, if not triple, your initial investment in a decade.
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Innovative Industrial Properties
Another top-notch dividend stock that would be a perfect place to put $3,000 to work right now is cannabis-focused REIT Innovative Industrial Properties (IIPR 0.06%).
Innovative Industrial Properties, or IIP for short, acquires medical marijuana cultivation and processing facilities with the intent of leasing these properties out for long periods of time. Though acquisitions are the company's primary source of growth, it does have a modest organic growth component built in. It passes along inflation-based rental increases to its tenants on an annual basis, and it also collects a 1.5% property management fee that's based on the annual rental rate.
The beauty of IIP's operating model is that it's highly predictable. As of the end of May 2021, the company owned 72 properties spanning 6.6 million rentable square feet in 18 states. All of its rentable space was leased, with a weighted-average lease length of 16.8 years. My belief is that it'll take less than half of this time for IIP to completely recoup the $1.6 billion it's committed in capital to these 72 properties.
Also working in Innovative Industrial Properties' favor is the lack of progress on cannabis banking reform at the federal level. As long as marijuana remains a federally illicit substance in the U.S., access to basic banking services will be dicey for marijuana stocks. IIP resolves this issue with its sale-leaseback program. It acquires cultivation and processing facilities for cash from multistate operators (MSO) and immediately leases these properties back to the seller. In doing so, the MSO gets much-needed cash, while IIP lands a long-term tenant.
Innovative Industrial's profit growth alone could be enough to double investors' money well before the decade is over. But tack on a 2.8% yield and a payout that's bound to grow over time, and you have a dividend stock that should have no trouble doubling investors' money.
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Viatris
Even though healthcare stocks aren't known for their dividends, generic-drug company Viatris (VTRS 1.67%) offers the perfect combination of long-term operating growth potential and dividend income to double investors' money.
Not familiar with the Viatris name? Don't worry, you're not alone. In mid-November, Viatris was formed by the merger of Pfizer's Upjohn unit -- Upjohn was a division that handled the manufacturing of brand-name and licensed therapies whose patents had expired -- with generic-drug manufacturer Mylan.
Why combine Upjohn with Mylan? To begin with, the duo offers a considerably broader portfolio of therapeutics, which should help with near-term and long-term pricing power. There are significant cost synergies to be realized from this combination, too. By the end of 2023, eliminating operating redundancies should reduce the combined company's annual expenses by $1 billion. These cost-savings, coupled with its ongoing operating cash flow, should allow it to pay down roughly a quarter of its debt load by the end of 2023.
If cost-cutting and debt-reduction efforts remain on track following an expected trough year for the company in 2021, it'll look to invest in research and development in 2024, as well as tinker with the idea of a share buyback program.
Lastly, don't overlook that generic drugs are only going to grow in importance as the U.S. population ages and the global population gains access to healthcare services. With the list prices of brand-name drugs soaring, consumers and insurers will turn to cost-effective generics.
At just over 4 times Wall Street's forward-year profit projections, Viatris appears dirt cheap and a smart place to put $3,000 to work right now.
