Since the Great Recession ended 12 years ago, growth stocks have proved unstoppable. That's because a dovish central bank and historically low lending rates have allowed fast-paced companies access to abundant cheap capital that they've used to hire, expand, and innovate.
But when examined over the very long term, dividend stocks are clear-cut outperformers. According to a report from J.P. Morgan Asset Management in 2013, companies that initiated and grew their payouts over a 40-year stretch (1972-2012) delivered an annualized total return, including dividends, of 9.5%. By comparison, stocks that didn't pay a dividend offered an annualized total return of just 1.6% over the same period.
More often than not, dividend stocks are the secret sauce to a successful investment portfolio. As we steam ahead in September, the following three dividend stocks stand out in all the right ways and are begging to be bought.
AT&T: 7.6% yield
AT&T hasn't been a Wall Street favorite over the past four months and has practically run in place over the past decade -- if we strictly look at its share-price performance. There have been concerns about the company's growing debt levels, and investors weren't thrilled about its plans to spin off WarnerMedia and combine it with Discovery (NASDAQ:DISCA)(NASDAQ:DISCK) to create a new media entity (WarnerMedia-Discovery). When this combination is complete, we'll see AT&T's 7.6% yield drop down to about the 4.5% range.
While income seekers probably aren't happy about this coming decline in yield, there are a number of reasons to be excited about AT&T's future now that it's put the wheels in motion on its media spinoff.
For starters, existing shareholders are going to get a stake in a media entity that'll be focused on streaming content. This should help AT&T differentiate itself from other streaming giants, such as Netflix and Walt Disney, thanks to its sports exposure and original content. In other words, investors are going to get added transparency from AT&T's fastest-growing segment.
Discovery President David Zaslav, who'll lead WarnerMedia-Discovery, is aiming for 400 million global subscribers, which would nearly quintuple the 85.5 million combined subscribers today for HBO and HBO Max (67.5 million) and Discovery (18 million). At the same time, spinning off WarnerMedia will free up AT&T to focus on its wireless segment and pay down some of its cumbersome debt.
This is an exciting time for wireless companies, as it marks the first time in a decade that wireless download speeds are being substantially improved. The rollout of 5G networks should create a sustainable multiyear technology-upgrade cycle that leads to increased data consumption. And data is what drives AT&T's wireless margins.
The bottom line is this 7.6% yield is here to stay until the spinoff occurs in mid-2022. After that, investors will still have a market-topping yield in AT&T, as well as access to faster-growing media assets via the WarnerMedia-Discovery deal.
Innovative Industrial Properties: 2.2% yield
Dividend stocks don't need off-the-chart yields to be productive for investors. Despite its rather tame 2.2% yield, cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) remains as exciting an investment as ever.
Innovative Industrial Properties, or IIP for short, has a pretty simple operating model. It aims to acquire medical marijuana cultivating and processing facilities that it then leases out for long periods of time. While most of the company's growth will come from acquisitions, it does pass along inflationary rental increases each year, as well as collects a property-management fee that's based on the annual rental rate. Long story short, there's a modest organic growth component that can provide a little extra kick.
As of mid-August, IIP had 74 properties in its portfolio spanning 18 states and covering 6.9 million square feet of rentable space. The kicker is that 100% of this rentable space was completely leased, with a weighted-average lease length of 16.6 years. The implication is that IIP should enjoy highly predictable cash flow for more than a decade to come.
Another important catalyst to the Innovative Industrial Properties growth story is the continued failure of cannabis banking reform at the federal level. Even though most Americans favor a nationwide legalization of pot, its Schedule I status at the federal level means most banks and credit unions won't offer marijuana stocks basic financial services. As long as this remains the case, IIP can step in with its sale-leaseback program.
Under the sale-leaseback program, IIP acquires properties from multistate operators (MSOs) for cash. It then leases the property back to the seller. This agreement allows MSOs to bulk up their balance sheet with cash, while netting IIP a number of established long-term tenants.
Since doling out its first quarterly dividend four years ago, Innovative Industrial Properties has grown its payout by 833%, all while its share price is up more than 1,600%. Though a repeat performance is highly unlikely over the coming four years, a juicier payout and higher share price is a distinct possibility.
Invesco Mortgage Capital: 11.7% yield
If ultra-high-yield dividend stocks are your thing, mortgage REIT Invesco Mortgage Capital (NYSE:IVR) and its 11.7% yield are begging to be bought.
Mortgage REITs are companies that borrow money at short-term lending rates and use that capital to acquire assets (mortgage-backed securities) with a higher long-term yield. The goal here is to maximize the difference between the average yield on assets held minus the average borrowing cost. This difference is known as net interest margin.
Last year, when the pandemic struck, Invesco found itself in a world of trouble because its portfolio was packed with commercial mortgage-backed securities and credit-risk transfer assets that were non-agency. A non-agency security isn't backed by the federal government in the event of default.
However, management has wised up over the past year and change and is now almost exclusively focusing on agency securities. Though the yields on agency assets are lower than non-agency securities, the protection from default is invaluable and provides Invesco Mortgage with the opportunity to utilize leverage to pump up its profit potential.
Something else to notice about mortgage REITs is that they perform particularly well during the first few years of an economic recovery. Typically, economic bouncebacks feature a steepening yield curve (i.e., long-term yields rising at a much faster pace than short-term yields), which has a tendency to widen the net interest margin for mortgage REITs. This is often a formula for valuation expansion for mortgage REITs like Invesco.
Lastly, Invesco can be gobbled up for 5% below its book value of $3.26 a share, as of this past weekend. Although the book value for mortgage REITs can fluctuate, the expectation is we'll see higher book values over the coming years as net interest margin widens. In short, this discount is investors' cue to pounce on this ultra-high-yield small-cap stock.