There are a number of ways for investors to make money on Wall Street. However, dividend stocks stand head and shoulders above their peers.
In 2013, J.P. Morgan Asset Management released a report that compared the performance of companies that initiated and grew their dividend to non-dividend-paying stocks over a four-decade stretch (1972-2012). The result? Dividend-paying stocks delivered an annual average gain of 9.5% over 40 years. By comparison, the non-dividend-paying companies managed a meager 1.6% annualized return over the same time frame.
Because dividend stocks are often profitable and time-tested, they're the ideal way for long-term investors to put their money to work in any economic environment.
If you're looking for market-topping dividend stocks -- i.e., companies paying a yield superior to the broad-based S&P 500 -- that can generate significant wealth and income, the following four have the potential to double your money by 2026.
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AGNC Investment Corp.: 8.8% yield
For the better part of the past decade, mortgage real estate investment trusts (REITs) have been Wall Street outcasts. But with certain economic factors now working in their favor, the next five years could be especially favorable for an ultra-high-yielding stock like AGNC Investment Corp. (AGNC -1.93%).
Pretty much nothing matters more to mortgage REITs than interest rates. That's because mortgage REITs borrow money at short-term lending rates with the purpose of using this capital to acquire mortgage-backed securities (MBSs) that provide a higher long-term yield. AGNC and its peers are always looking for ways to maximize the difference between the average yield on assets held and the average borrowing cost. This difference is known as the net interest margin.
The great thing for investors is that the mortgage REIT space is transparent. If the interest rate yield curve is flattening (i.e., the gap between short-term and long-term yields is shrinking), or if the Federal Reserve is rapidly changing its monetary stance, mortgage REITs like AGNC perform poorly. Conversely, when the yield curve is steepening and the Fed is telegraphing its moves in an orderly fashion, companies like AGNC thrive. We're 100% in the latter scenario at the moment, and we're likely to stay in this scenario for years to come.
As the U.S. economy gains its footing, we should witness a slow but steady expansion of AGNC's net interest margin. When coupled with its use of leverage to boost profitability, AGNC Investment has a good shot to deliver serious income to shareholders and provide a modest average annual return on its shares through 2026.
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Innovative Industrial Properties: 2.3% yield
Try this on for size: A marijuana stock that pays a dividend.
While it's abnormal for a high-growth company to pay a dividend, it's perfectly normal for a REIT to parse out most of its earnings in the form of a dividend to its shareholders. That's exactly the case with cannabis-focused REIT Innovative Industrial Properties (IIPR -1.61%).
Innovative Industrial Properties, or IIP for short, acquires medical marijuana-focused cultivation and processing facilities with the purpose of leasing them out for long periods of time. Though acquisitions are IIP's primary source of growth, investors should keep in mind that inflationary rental increases, and a property management fee based on the annual rental rate, are passed along annually to its tenants. Thus, there is a modest organic growth component built into its operating model.
As of mid-August, IIP owned 74 properties spanning 6.9 million square feet of rentable space in 18 states. The more important figure is that 100% of this space was leased, with a weighted-average lease length of 16.6 years. It should take less than half this time for the company to net a complete repayment on its invested capital.
The icing on the cake for Innovative Industrial Properties is that a lack of cannabis banking reform in the U.S. has worked in its favor. The company's sale-leaseback program has been especially popular with multistate operators.
It's a fast-growing income stock that could double your money by 2026.
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Viatris: 3% yield
Another market-topping dividend stock with all the tools necessary to double investors' money by 2026 is drug company Viatris (VTRS -0.09%). If the name doesn't ring a bell, it's because it was formed less than a year ago from the combination of Pfizer's established medicines unit Upjohn and generic drugmaker Mylan.
As a combined company, Viatris is expected to perform better and be able to do more from a growth perspective than Upjohn and Mylan would have ever been able to do as stand-alone companies. While combining forces did leave the company with about $26 billion in debt, the expectation is that a quarter of this debt ($6.5 billion) will be paid off by the end of 2023. Once debt levels dip below $20 billion, the company can consider share repurchases, and will almost certainly invest in new drug development.
Something else that gets overlooked about Viatris is the key role it'll play in the generics space. Since generic medicines have considerably lower margins than brand-name drugs, volume is important. With the list prices of brand-name drugs moving higher at a precipitous pace, it seems only logical to expect the use of generics to rise over time. Patients and insurers will both be looking to cut costs, and generic-drug developers are the obvious beneficiary.
Viatris is also dirt cheap, which could be a selling point for value investors. It's generated $2 billion in operating cash flow over the trailing 12 months, and it can be bought for less than four times forecasted earnings per share in 2021. Tack on a 3% yield, and you have a recipe for success.
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Annaly Capital Management: 10.1% yield
No list of market-topping dividend stocks is ever complete without Annaly Capital Management (NLY -2.28%), which I believe is the top ultra-high-yield dividend stock income seekers can buy. Between its double-digit yield and share price-appreciation potential, this mortgage REIT is capable of doubling investors' money by 2026.
As I described with AGNC Investment, mortgage REITs are in the sweet spot of their growth cycle. Pretty much every economic recovery dating back decades has seen the yield curve steepen. As long-term yields rise, Annaly should be able to net a higher average yield on the MBSs it purchases. At the same time, short-term borrowing costs should remain flat or rise at a slower pace. That's a formula for a widening net interest margin.
Something else critical to Annaly's success (and that of AGNC, as well) is its focus on agency-backed securities. These are assets backed by the federal government in the event of default. As of June 30, $66.5 billion of its $69 billion in held securities were agency MBSs. Although this added layer of protection does lower the yield Annaly nets from these securities, it also provides the runway for the company to utilize leverage in order to increase its profit potential.
Since its inception in 1997, Annaly has paid more than $20 billion in dividends to shareholders. It's also averaged about a 10% yield over the past two decades. It's a good bet to consistently deliver for its shareholders through at least the midpoint of the decade.
