While there is no shortage of strategies that are effective moneymakers on Wall Street, buying dividend stocks has been a particularly smart method to build wealth.
In 2013, the J.P. Morgan Asset Management division of JPMorgan Chase released a report examining the average annual return of companies that initiated and grew their dividend between 1972 and 2012, as compared with publicly traded companies that didn't pay a dividend over the same period. The difference in average annual return was night and day. Dividend stocks averaged a 9.5% annual return over the four decades, whereas the stocks that didn't pay dividends delivered a paltry annualized return of 1.6%.
The biggest dilemma income investors encounter is wanting the highest yield possible with the least amount of risk. Unfortunately, once you reach the high-yield space (4% and up), yield and risk tend to be correlated.
But that doesn't mean all high-yield dividend stocks are bad news. If you wanted to sit back and collect $1,500 in quarterly dividend income, you could do so by putting up an initial investment of $63,000 and splitting it evenly among the following four stocks, which sport an average yield of 9.53%.
Enterprise Products Partners: 8.36% yield
If there's such a thing as a premier ultra-high-yield dividend stock in the energy space, its master limited partnership Enterprise Products Partners (EPD 0.04%). Its nearly 8.4% yield is, amazingly, the lowest on this list. However, the company has increased its base annual payout for 22 consecutive years, making it one of the safest ultra-high-yield stocks on the planet.
For most income investors, the ideas of "safe" and "oil stock" probably don't belong in the same sentence. Last year's historic demand drawdown for crude oil turned the upstream drillers on their heads. But Enterprise Products Partners was insulated from this chaos thanks to its role as a midstream company.
According to the company, it operates more than 50,000 miles of oil, natural gas, and natural gas liquid pipelines throughout the U.S., as well as 14 billion cubic feet of natural gas storage. The beauty of Enterprise Products' operating model is its highly transparent take-or-pay contracts. With most of its transmission and storage services spoken for in advance, management is able to outlay capital for new projects without any surprises. This allows for infrastructure advancements and long-term cash flow expansion.
If you need further evidence that Enterprise Products Partners is rock-solid, take a closer look at its distribution coverage ratio. During the worst of the pandemic, it didn't drop below 1.6 (any figure below 1 would signify an unsustainable payout). Slow and steady growth makes Enterprise Products one of the finest income stocks to own.
AGNC Investment: 8.99% yield
For those of you who simply can't wait to get your hands on that dividend income, let me introduce you to AGNC Investment (AGNC -0.09%). AGNC is a mortgage real estate investment trust (REIT) that pays out its dividend monthly: $0.12 per month, equating to a $1.44 base annual payout. It currently yields about 9%, but has averaged a double-digit yield in 11 of the past 12 years.
A mortgage REIT is a company that borrows money at lower short-term lending rates with the intent to use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The difference between this average long-term yield and short-term borrowing rate is known as the net interest margin. And, as you might guess, the wider this margin, the more profit potential for AGNC and other mortgage REITs.
What makes AGNC so intriguing is that we've entered the sweet spot where mortgage REITs thrive. Looking back at multiple economic recoveries from a recession, it's normal for the yield curve to steepen. This describes a situation where long-term bond yields rise while short-term bond yields fall or flatten. A steepening yield curve coupled with transparently laid-out monetary policy from the Federal Reserve is usually a recipe for net interest margin expansion for the mortgage REIT industry.
With share price appreciation potential and a 9% yield to boot, AGNC Investment is an income investor's dream come true.
Antero Midstream: 9.15% yield
Though Enterprise Products Partners is the king of the hill among safe, ultra-high-yield energy companies, Antero Midstream (AM -0.56%) is a very respectable second fiddle on this list. This midstream operator is yielding nearly 9.2% and has a strong track record of returning most of its cash flow to shareholders in the form of a dividend.
Unlike Enterprise Products, Antero was forced to reduce its distribution earlier this year. Its quarterly payout declined 27% to $0.225 from $0.308. However, it wasn't the pandemic that coerced this move. Parent company Antero Resources (AR -2.06%) is upping its natural gas drilling on Antero Midstream's dedicated acreage. In other words, Antero Midstream has reallocated some of the capital it would normally have paid out via dividends to boost its capital budget and beef up its transmission and storage infrastructure. Curtailing the dividend now and upping its 2021 infrastructure spending is expected to add $400 million in incremental free cash flow for Antero Midstream through 2025.
What's more, Antero Midstream had been actively repurchasing its stock prior to parent Antero Resources announcing its intent to boost natural gas production. Antero Midstream has since put this buyback program on the back burner, but nevertheless extended the remaining $150 million in repurchase capacity through the end of 2023. It looks as if shareholders are going to benefit from increased transmission/storage needs, higher cash flow, and an eventual resumption of this buyback program.
Invesco Mortgage Capital: 11.61% yield
Saving the highest yield for last, we have mortgage REIT Invesco Mortgage Capital (IVR 0.07%). Reinvesting your payouts with an 11.6% yield would double your initial investment in roughly six years.
Last year, Invesco found itself in some deep trouble, and the company's pulverized share price shows it. The company had a slew of commercial MBS and credit-risk transfer assets in its portfolio that were non-agency. A non-agency asset isn't backed by the federal government in the event of default. Not having this protection does boost the yield that mortgage REITs receive. Unfortunately, a steep recession, such as the one experienced during the pandemic, caused a wave of defaults that REITs simply couldn't handle.
The good news is that management appears to have learned its lesson. Invesco Mortgage has almost exclusively been purchasing residential agency MBS for its portfolio. Although agency assets sport lower yields than non-agency assets, this added protection allows Invesco to use leverage to increase its profit potential.
And, as I noted with AGNC, economic recoveries are generally a positive thing for mortgage REITs. In the second quarter, Invesco Mortgage Capital's average net interest margin expanded by 32 basis points to 2.12% from 1.8% in the sequential first quarter.
The ride will likely be bumpier with Invesco, compared with AGNC, given its 2020 miscues and its ongoing shift into agency MBS. But with management focused on agency assets, Invesco's ultra-high-yield payout can be trusted once more.