The stock market is great in that it allows investors a number of ways to build wealth on Wall Street. But if there's one near-constant among the world's most successful money managers, it's that they flock to dividend stocks.
Companies that pay a dividend are usually profitable and have time-tested operating models. They also have the clear upper-hand when it comes to long-term performance. When compared to non-dividend-paying stocks over a 40-year period (1972-2012), dividend stocks provided the superior average annual return (9.5% vs. 1.6%), according to a report from J.P. Morgan Asset Management.
In an ideal world, income seekers want the highest yield possible with the least risk. However, the data shows that the higher a dividend yield, often the bigger the risk and lower the reward.
Thankfully, not all ultra-high-yield dividend stocks are bad news. The following quartet of ultra-high-yield stocks, which are yielding a minimum of 7.5%, can be comfortably bought hand over fist by income investors right now.
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Annaly Capital Management: 9.9% yield
Arguably the safest moneymaker among ultra-high-yield dividend stocks just might be mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 1.33%). Annaly is paying out a nearly 10% yield at the moment, has averaged about a 10% yield for more than two decades, and has collectively paid more than $20 billion in dividends since its initial public offering.
In really simple terms, mortgage REITs borrow money at lower short-term rates and use that capital to purchase assets (mortgage-backed securities) with higher long-term yields. This difference between the higher long-term yield and the short-term borrowing rate is known as net interest margin. Annaly wants its net interest margin to be as wide as possible -- and so do investors, since Annaly pays out a majority of its operating income as a dividend to its shareholders.
The worst possible scenarios for mortgage REITs are when the yield curve is flattening, or if the Federal Reserve is rapidly adjusting its federal funds target rate. Conversely, a steepening yield curve and clearly laid-out monetary policy tends to be a best case-scenario for Annaly. Right now, we're in the latter, with the U.S. economy in full recovery mode and the yield curve having steepened.
Equally important, Annaly's asset portfolio skews heavily toward agency securities -- $92.6 billion out of $100.4 billion in total assets. Agency assets are backed by the federal government in the event of default. This protection allows Annaly to wisely use leverage to its advantage to boost its income potential.
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Enterprise Products Partners: 7.5% yield
I get it -- some folks are rightly worried about putting their money to work in the oil and gas industry after what happened during the coronavirus pandemic. This event led to a historic drop-off in crude oil demand and a very brief period where crude oil futures traded at negative prices. But there's one high-yield oil stock that rose above the fear: Enterprise Products Partners (EPD 1.41%).
How does an oil and gas stock easily withstand such an immense decline in demand? The answer has to do with Enterprise Products Partners' focus. Whereas upstream drillers were hammered by weak demand and lower prices, midstream companies like Enterprise, which handle the transmission and storage of oil, natural gas, and natural gas liquids (NGL), weren't hurt badly. Enterprise has over 50,000 miles of pipeline and 14 billion cubic feet of natural gas storage capacity.
The great thing about midstream companies is that their revenue is often based on preset contracts or fees (e.g., take-or-pay contracts). In other words, Enterprise generates very predictable cash flow from one year to the next, which allows it to allot for capital expenditures without the fear of overspending and jeopardizing its dividend.
Despite all of the industry's struggles last year, Enterprise Products Partners' distribution coverage ratio -- distributable cash flow divided by distributions to be paid to shareholders -- never dropped below 1.6, and it's currently 1.8. With a 22-year streak of increasing its base annual payout, Enterprise is a very safe ultra-high-yield dividend stock you can buy right now.
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Mobile TeleSystems: 8.7% yield
For you international stock investors, Russian telecom giant Mobile TeleSystems (MBT) is another smart way to build wealth and collect a boatload of income. If you were to reinvest your dividends at this 8.7% yield, MTS, as the company is also known, would double your initial investment in a little over eight years.
The company's primary business is providing wireless services throughout Russia. Although the Russian wireless market is highly saturated, MTS has a huge catalyst in its back pocket: the rollout of 5G. Upgrading its infrastructure to 5G in major Russian cities, as well as expanding 4G coverage to the country's suburbs, should lead to a multiyear technology upgrade cycle that sends data consumption soaring. Since wireless providers generate their juiciest margins from data, spending big on 4G and 5G is a no-brainer move by MTS to lift its organic growth rate.
Mobile TeleSystems is further looking to lift its growth rate by becoming something of a conglomerate. It now operates MTS Bank, offers paid television services, and even has cloud solutions. The first quarter saw cloud and digital solutions sales jump 28%, with MTS Bank's retail loan portfolio growing by a whopping 35%.
For the time being, these ancillary businesses are small potatoes next to wireless. However, the ability to bundle two or more of its services should lead to margin expansion and boost its organic growth potential.
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AGNC Investment Corp.: 8.5% yield
Annaly Capital Management has been successfully generating income for its shareholders for almost a quarter of a century. However, it's not the only mortgage REIT that can line investors' pockets right now. AGNC Investment Corp. (AGNC 0.99%) and its 8.7% yield can also be bought hand over fist. In the roughly 13 years AGNC has been a publicly traded company, it's also averaged a double-digit annual yield.
Like Annaly, we're in the sweet spot for AGNC. Even though long-term bond yields have tapered a bit over the past month, the yield curve has steepened significantly from where it began the year. This steepening should allow AGNC to net modestly higher yields on the longer-term mortgage-backed security assets it buys. After reporting a 1.30% net interest spread in the first quarter of 2020, AGNC's net interest margin widened 70 basis points to 2% on the nose in the most recent quarter.
Similarly, there's safety in these numbers. AGNC has chosen to focus almost exclusively on agency assets. It ended March with $90.3 billion in total assets, $63.6 billion of which were agency mortgage-backed securities, and only $1.9 billion of which were credit-risk transfers and non-agency assets. Having only 2% of its portfolio devoted to these riskier assets ensures steady net income.
As one final note, AGNC pays its dividend on a monthly basis ($0.12 per month). If you're impatient and prefer instant gratification, AGNC is the way to go.
