There are a number of ways for investors to build wealth on Wall Street. But if there's one near-constant for the world's most successful money managers, it's their love of dividend stocks.
Companies that regularly pay a dividend to their shareholders are usually profitable, have clear long-term outlooks, and offer time-tested operating models. It also doesn't hurt that for decades, they've run circles around their peers that don't pay dividends. The average annual return for companies that initiated and grew their payouts between 1972 and 2012 was 9.5%, which compares to just 1.6% annually for those that don't pay dividends, according to a report from J.P. Morgan Asset Management.
As talk of rising inflation picks up, now is the perfect time to consider putting dividend stocks to work in your portfolio. The following five dividend stocks can comfortably be bought hand over first for the second half of 2021.
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Annaly Capital Management: 9.5% yield
Arguably the most attractive income stock to combat inflation is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 1.33%). It currently yields 9.5% and has averaged a yield of around 10% for more than two decades.
In simple terms, mortgage REITs are companies that borrow money at lower short-term rates to buy assets (mortgage-backed securities) with higher long-term yields. The difference between the long-term yield received and lower short-term borrowing rate is known as the net interest margin. During the early stages of an economic recovery, it's normal to see the yield curve steepen -- i.e., long-term bond yields rise while short-term yields fall or flatten out. In other words, we're in the sweet spot where Annaly and its peers typically see their net interest margin expand.
If you're worried about the safety of this 9.5% yield, don't be. Annaly Capital almost exclusively purchases agency securities. These are assets backed by the federal government in the event of a default. As you might imagine, this added protection reduces the yields Annaly receives on the mortgage-backed securities it buys. However, it's also able to safely use leverage to boost its income.
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Innovative Industrial Properties: 2.9% yield
Who said you can't find an above-average dividend yield in a growth stock? Cannabis-focused REIT Innovative Industrial Properties (IIPR 0.37%) is expected by Wall Street to grow its revenue 67% this year and 39% next year, all while parsing out a nearly 3% yield to its shareholders.
Innovative Industrial Properties, or IIP, acquires medical marijuana cultivation and processing facilities with the intent of leasing them out for long periods of time. Through the end of May, it owned 72 properties in 18 states, with all 6.6 million square feet of its owned assets leased. According to the company, its weighted-average lease length is 16.8 years, and I'd estimate a complete payback on its $1.6 billion in invested capital in less than half that time.
A big reason IIP is so successful is that cannabis reform continues to fail at the federal level. As long as marijuana is federally illicit, access to basic banking services for pot stocks will be hit-and-miss. Innovative Industrial steps in with its sale-leaseback agreements to resolve some of these issues. It acquires cannabis facilities for cash and immediately leases the property back to the seller. As long as cannabis reform stalls on Capitol Hill, IIP will reap the reward.
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Enterprise Products Partners: 7.5% yield
With crude oil prices hitting multiyear highs, it's time to consider putting a high-yield midstream company to work for you. Master limited partnership Enterprise Products Partners (EPD 1.41%) and its juicy 7.5% yield could offer the perfect combination of share price appreciation and income.
While the very long-term future of the U.S. rests with renewable energy sources, it's also the case that oil, natural gas, and natural gas liquids (NGL) are here to stay for decades to come. The safest bet within that space are the midstream operators like Enterprise Products Partners that handle pipeline transmission and storage. Enterprise has over 50,000 miles of pipeline and 21 NGL processing plants, which leads to highly predictable cash flow. It's set aside another $1.6 billion this year alone for capital expenditures to maintain and expand its existing infrastructure.
Whereas most oil and gas stocks struggled mightily during the unprecedented demand drop-off associated with the pandemic, Enterprise hardly flinched. Its distribution coverage ratio -- distributable cash flow divided by distributions to be paid to shareholders -- has remained at 1.6 or higher, and the company is averaging a return on invested capital of 12% over the past decade. After 22 consecutive years of increasing its base annual dividend, it's safe to say this is a rock-solid income stock.
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Viatris: 3% yield
Although healthcare stocks aren't known for being big income producers (most healthcare companies are constantly reinvesting in research and development), generic-drug company Viatris (VTRS 1.17%) is currently paying out a market-topping 3% yield. Viatris was formed from the combination of generic-drug company Mylan with Pfizer's established drug unit Upjohn.
Even though Wall Street is likely clouded by the combined debt load of these two companies, which at one point was around $26 billion, there are numerous competitive advantages to this combination. By 2023, Viatris should be recognizing around $1 billion in annual cost synergies. There's also the likelihood that a broader portfolio of established and generic products will command better pricing power, which can be a positive for margins and operating cash flow. Within three years, management expects to have repaid 25% of the company's outstanding debt and may look to reinvest via internal drug development.
What's more, as brand-name drug prices rise and the baby boomer population ages, demand for reasonably priced generics is bound to go up. Investors simply aren't going to find too many dividend stocks they can buy for just 4 times this year's forecast earnings per share.
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NextEra Energy: 2.1% yield
Last, but not least, America's largest electric utility stock by market cap, NextEra Energy (NEE 0.45%), can be bought hand over fist by income seekers. Though NextEra's yield of 2.1% is the lowest among these five dividend plays, its stock offers steady upside for patient investors.
Generally, utility stocks are boring, slow-growing businesses. However, NextEra breaks the mold. That's because it's aggressively investing in renewable energy solutions. The company has set aside $50 billion to $55 billion for new projects between 2020 and 2022, and is already leading the country in capacity generated from solar and wind power. Though these investments aren't cheap, it's paying off with lower electric generation costs and a compound annual growth rate in the high single digits over the past decade.
As with Enterprise Products Partners, NextEra's operating results are highly predictable. Consumer demand doesn't change much from year to year (i.e., electricity is a basic-need service), and the company's traditional utility operations (those not powered by renewable energy) are regulated. This is fancy way of saying that state public utility commissions dictate whether NextEra can raise its rates or not. This might sound like a pain, but it's actually great news, because it keeps the company away from being exposed to potentially volatile wholesale pricing.
