For the past 12 years, growth stocks have been all the rage on Wall Street. This shouldn't surprise anyone given that historically low lending rates and ongoing quantitative easing measures from the Federal Reserve have encouraged fast-growing companies to borrow in order to hire, acquire, and innovate.
But what you might not realize is that dividend stocks are the market's true long-term outperformer. A report from J.P. Morgan Asset Management in 2013 found that companies initiating and growing their payouts between 1972 and 2012 averaged an annual return of 9.5%. By comparison, stocks that didn't pay a dividend clawed their way to only a 1.6% annualized gain over the same four-decade stretch.
Since dividend stocks are often profitable and time-tested, they're the ideal wealth-building vehicle for long-term investors. In fact, the following four perfect dividend stocks offer the potential to double investors' money in seven years, or less.
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Annaly Capital Management: 10.3% yield
First up is my unquestioned favorite ultra-high-yield dividend stock, mortgage real estate investment trust (REIT) Annaly Capital Management (NLY -1.30%).
A lot of people look at the mortgage REIT industry and scratch their heads because it sounds complex. The simple gist is that Annaly is looking to borrow money at low, short-term rates, and uses this capital to buy assets, such as mortgage-backed securities (MBS), which offer higher long-term yields. Subtract Annaly's average borrowing rate from its average long-term yield and you have the company's net interest margin. The wider this margin, the more profitable the company can become. As I said, pretty straightforward.
What really matters to Annaly are interest rates and a central bank that acts slowly and telegraphs its every monetary policy move. When the Fed is moving quickly and/or the yield curve is flattening, Annaly's net interest margin usually constricts. Meanwhile, when the yield curve is steepening and the Fed is moving slowly on interest rate changes, Annaly tends to see its net interest margin expand. We're in the latter scenario at the moment, with Annaly typically seeing its strongest operating performance during the early years of a bull market.
The bottom line is that Annaly has averaged an annual yield of around 10% over the past 20 years, and has returned north of $20 billion to its shareholders via dividend since its inception. At a yield of 10.3%, reinvesting your payout would double your money in seven years -- and that's with the share price remaining static. Given the headwinds favoring the mortgage REIT industry, income investors should enjoy a hearty payout and modest share price appreciation.
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Innovative Industrial Properties: 2.5% yield
Marijuana stock Innovative Industrial Properties (IIPR -1.50%) proves that income investors don't need a double-digit yield to double their money over the next seven years.
Innovative Industrial Properties, or IIP for short, is a medical marijuana-focused REIT. It acquires cultivation and processing facilities with the intent of leasing these assets out for a long period of time. As of Aug. 16, 2021, it owned 74 properties spanning 6.9 million square feet of leasable space in 18 states. The best part is that all 6.9 million square feet has been leased, with a weighted-average lease length of 16.6 years.
Even though IIP stopped reporting its yield on invested capital over a year ago, its last reported yield of more than 13% suggests it'll recoup its approximately $1.7 billion in committed capital in less than seven years.
While acquisitions remain the driving force behind its growth, it's worth pointing out that IIP does have a modest organic growth component built into its operating model. It passes along a 3.25% rental hike to its tenants on an annual basis, as well as charging a 1.5% property management fee that's tied to the base annual rental rate.
What's more, Innovative Industrial Properties benefits from its sale-leaseback program. As long as cannabis remains illicit at the federal level, multistate operators (MSOs) may struggle to access basic banking services. IIP can help fill this role by purchasing facilities for cash and immediately leasing them back to the seller. This provides MSOs with much-needed cash, while netting IIP long-term tenants.
In other words, IIP's rapid growth could double its share price in under seven years, with its 2.5% yield acting as the icing on the cake.
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Mobile TeleSystems: 11% yield
For income investors who want the dividend to do the bulk of the work, Russian telecom giant Mobile TeleSystems (MBT) may be the answer. Keep in mind that while it does sport the highest yield on this list, 11%, its biannual dividend isn't set in stone, but is rather based on its operating performance. Over the past five years, the company's yield has vacillated between 7% and 15%, with an average of around 9%.
One of the biggest catalysts for Mobile TeleSystems, also known as MTS, is the rollout of 5G infrastructure in major markets. The move to 5G, as well as the ongoing push to make 4G more accessible in Russia's smaller cities, should lead to a multiyear wireless device upgrade cycle. Even with high wireless saturation rates throughout Russia, this replacement cycle should boost the demand for data and steadily expand MTS' wireless and retail margins.
What's notable about MTS is that it's moving well beyond its role as just a wireless company. It has a number of new revenue-generating ventures, including MTS Bank, cloud services, and paid-TV subscriptions. MTS has seen particularly strong growth in over-the-top paid subscriptions, which grew 189% to approximately 2.9 million in the first quarter of 2021, relative to the year-ago quarter. These ancillary operations are growing considerably faster than its wireless operations.
If income investors were to reinvest their payouts and stay the course while Mobile TeleSystems puts its capital to work in higher-margin ventures, they should see their initial investment double in under seven years.
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AGNC Investment Corp.: 8.9% yield
Have I mentioned that mortgage REITs are a really smart way for income investors to build wealth? Though Annaly is my favorite of the group, there's plenty of room for investors to double up and net big gains from AGNC Investment Corp. (AGNC -1.53%).
The premises that applied to Annaly also apply to AGNC. As the yield curve steepens during an economic recovery, we should see AGNC netting more favorable yields from its long-term MBSs, which will ultimately widen its net interest margin. We're right in that sweet spot where mortgage REITs enjoy an expansion of their operating income.
What's important to note about AGNC -- and this holds true for Annaly, as well -- is that the vast majority of its asset portfolio is comprised of agency securities. Agency assets are backed by the federal government in the event of a default. On one hand, this added protection does lower the yield potential of agency securities, compared to non-agency assets. However, it also allows AGNC (and Annaly) to prudently use leverage to its advantage. With the central bank slow-stepping its monetary moves, AGNC can lean on leverage to pump up its profits.
For you impatient income seekers, you'll notice that AGNC Investment pays its dividend out monthly. Furthermore, its average annual yield has been 10% or higher in 11 of the past 12 years. All it would take is very modest share price appreciation and reinvesting your payouts to double your initial investment in seven years, or less.
