Though the stock market provides few guarantees, one investing strategy that offers a high degree of success is buying dividend stocks.
According to a report from J.P. Morgan Asset Management that was released in 2013, companies that initiated and grew their payouts between 1972 and 2012 averaged an annual return of 9.5%. Comparatively, non-dividend-paying stocks scraped and clawed their way to a meager annual average return of 1.6% over the same time frame. This disparity shouldn't come as a surprise, given that dividend stocks are often profitable and have time-tested operating models.
As we move into the warm summer days of August, the following four dividend stocks stand out as particularly attractive and can confidently be bought hand over fist by income-seeking investors.
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AGNC Investment Corp.: 9.1% yield
In terms of ultra-high-yield dividend stocks, mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 0.99%) is bound to turn heads. It's not often you'll find a company that pays a sustainable 9.1% yield and has averaged a greater than 10% yield for 11 of the past 12 years.
AGNC's mortgage REIT model is pretty simple to wrap your hands around. It borrows money at lower short-term lending rates and uses that capital to acquire assets, such as mortgage-backed securities, which pay a higher long-term yield.
Subtract the short-term borrowing rate from the average long-term yield and you have AGNC's net interest margin. The wider this margin, the more profit AGNC has the potential to generate.
It should be noted that mortgage REITs tend to be highly interest-rate sensitive. When the yield curve is flattening, or if the Federal Reserve is making large changes to its federal funds target rate, mortgage REITs perform poorly. Conversely, when the yield curve is steepening and the nation's central bank is making slow, calculated moves on the interest-rate front, companies like AGNC can thrive. We're currently in the latter scenario, which is common during the early stages of an economic recovery.
The added bonus for AGNC Investment, aside from its monthly dividend payout, is that its portfolio is packed with agency securities. These are assets protected from default by the federal government. Thus, buying agency assets allows AGNC to safely use leverage to its advantage.
Image source: U.S. Bank (U.S. Bancorp is U.S. Bank's parent company).
U.S. Bancorp: 3.3% yield
Speaking of interest-rate sensitivity, another dividend stock that can be bought hand over fist in August is regional banking-giant U.S. Bancorp (USB 2.56%).
To again keep things simple, bank stocks are cyclical and perform their best when the economy is growing. Since the U.S. economy spends a disproportionate amount of time expanding, relative to contracting, bank stocks are bound to benefit from increased loan and deposit activity over the long run. In other words, as this economic recovery gains steam, stronger growth and eventually higher interest rates will help drive profits higher for major players like U.S. Bancorp.
What really differentiates U.S. Bancorp from the seemingly hundreds of banks investors can choose from is its historically superior return on assets (ROA). Whereas most banks target a 1% ROA, U.S. Bancorp has seemingly managed a 1.6% ROA in its sleep. The company's secret sauce is its digitization efforts.
In the May-ended quarter, 80% of the company's transactions, including over 60% of total sales, were conducted digitally (online or via mobile app). That compares to 67% of all transactions completed digitally in the comparable quarter two-years prior. Since online and mobile transactions cost a fraction of what phone and branch transactions run, this shift has allowed U.S. Bancorp to consolidate some of its branches in order to reduce its noninterest expenses.
The icing on the cake for U.S. Bancorp is that its management team has avoided the riskier derivative investments that've sunk larger money-center banks during recessions. By sticking with the bread and butter of banking -- loans and deposits -- U.S. Bancorp and its 3.3% yield are a steal.
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Broadcom: 3% yield
For more than a decade, there hasn't been a bad time to buy chipmaker Broadcom (AVGO -4.31%). It's riding a 12-year winning streak, and that'll likely continue to be the case for investors buying and holding for the long term.
The most plain-as-day catalyst for the company is the ongoing rollout of 5G wireless infrastructure. It's been a decade since wireless carriers rolled out significant upgrades to download speeds, which'll almost certainly fuel a multiyear technology upgrade cycle for consumers and businesses. A majority of Broadcom's sales are tied to the next-generation wireless chips and semiconductor devices that ultimately wind up in smartphones.
However, investors would be wise not to overlook growing data center demand. Prior to the pandemic, we were witnessing a steady shift of enterprise data moving into the cloud. But following virus-related lockdowns, businesses have had little choice but to create an online presence and move their data into the cloud. As storage demand picks up, Broadcom, which makes everything from connectivity to access chips for data centers, should be a prime beneficiary.
Within the tech space, there's arguably no company that offers more robust dividend growth. In just over 10 years, Broadcom's quarterly payout has catapulted from $0.07 to $3.60 -- a better than 5,000% increase. If robust recent chip demand is any indication, this payout, and Broadcom's share price, will probably head even higher.
Image source: Getty Images.
NextEra Energy: 2% yield
The fourth and final dividend stock to buy hand over fist in August is electric-utility giant NextEra Energy (NEE 0.45%). Though its yield is only 2% -- that's still about 70 basis points higher than the S&P 500's current yield -- NextEra makes up for its modest payout in other ways.
Generally speaking, electric-utility stocks pay market-topping yields but grow by a low-single-digit percentage. In the case of NextEra, we're talking about a utility stock that's averaged a high-single-digit compound annual growth rate for more than a decade. NextEra's not-so-subtle differentiator is renewable energy.
Between 2020 and 2022, the company plans to invest $50 billion to $55 billion in new infrastructure projects, nearly all of which will target renewable energy. Right now, no utility in America generates more capacity from solar or wind power than NextEra. Although green-energy investment isn't cheap, the company is benefiting from historically low lending rates and a considerable decline in electricity-generation costs as its renewable energy capacity increases.
However, NextEra also gets a boost from its traditional electric operations (i.e., those not powered by renewable energy sources). This traditional segment is regulated, which means NextEra has to request rate hikes from the state public utility commission.
Before you start thinking that's a growth constraint, keep in mind that regulated utilities aren't exposed to potentially volatile wholesale pricing. In effect, being regulated makes its cash flow highly predictable.
Considering that the S&P 500 hasn't had a notable correction in 16 months and counting, owning a defensive dividend payer like NextEra could be a smart idea.
