Since the end of the Great Recession in 2009, growth stocks have rightly been the talk of Wall Street. Historically low lending rates have paved the way for fast-growing companies to borrow at cheap rates in order to hire, innovate, and acquire other businesses.
But truth be told, dividend stocks have been the place to be over the long run.
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A 2013 report from J.P. Morgan Asset Management showed that companies initiating and growing their payouts between 1972 and 2012 averaged an annual return of 9.5%. Comparatively, companies that didn't offer a payout only gained an annual average of 1.6% over the same time frame.
While it's clear that profitable, time-tested companies paying a dividend have delivered superior long-term returns, the question remains: Which dividend stocks to buy? Ideally, income seekers want the highest yield possible with the least amount of risk. However, once you reach the high-yield mark (a payout of 4% or higher), risk and yield tend to be correlated. This means high-yield stocks can often be more trouble than they're worth.
But this doesn't mean all high-yield dividend stocks are off limits. There's a trio of ultra-high-yield stocks (what I'd arbitrarily define as a 7% or higher yield) that investors can buy right now that would lead to some serious income potential. If you were to invest $114,000 and divide it equally into these three stocks, you'd be set to receive $10,000 in annual dividend income, representing an average yield of 8.79%, based on closing prices for Sept. 28.
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Annaly Capital Management: 9.99% yield
The ultra-high-yield stock I have the utmost confidence will deliver for conservative, long-term, income-seeking investors is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 1.33%). Annaly is effectively yielding 10%, and has averaged a roughly 10% payout for the past two decades. In other words, this isn't a flash-in-the-pan high-yield. Since it was founded in 1997, Annaly's payout has consistently been many multiples higher than the benchmark S&P 500.
The mortgage REIT operating model is pretty straightforward. Companies like Annaly are looking to borrow money at lower short-term lending rates and use their capital to purchase higher-yielding long-term assets, such as residential mortgage-backed securities (RMBS). The goal is to widen the company's net interest margin -- the difference in average yield received from RMBSs minus the average borrow rate -- as much as possible. As I said, it's a pretty cut-and-dried business model.
What really matters for Annaly Capital Management is interest rates, and in this respect, everything looks to be working in its favor. Annaly usually performs poorly when the yield curve is flattening (i.e., the difference between long-term and short-term Treasury yields shrinks) and/or the Federal Reserve is undertaking big changes to its federal funds rate and monetary policy.
On the other hand, when the yield curve is steepening and the nation's central bank is walking on eggshells with regard to monetary policy changes, Annaly performs well. During the early years of an economic recovery, we're almost always in this favorable scenario.
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AGNC Investment Corp. 8.93% yield
Have I mentioned how powerful mortgage REITs can be for income investors' portfolios? AGNC Investment Corp. (AGNC 0.99%) is currently doling out nearly a 9% yield and has averaged a double-digit yield for 11 of the past 12 years. Perhaps best of all, AGNC parses out a monthly payout of $0.12 per share. If you're the impatient type, a monthly payout from AGNC Investment could be the answer.
All of the variables described above with Annaly are applicable to AGNC. A steepening yield curve during an economic recovery in the U.S. should halt upside for shorter-term borrowing rates and allow the company to acquire modestly higher-yielding RMBSs over time. Unsurprisingly, AGNC's average net interest spread, excluding what the company refers to as "catch-up" premium amortization, jumped to 2.09% in the June-ended quarter from 1.68% in the year-ago period.
Another reason AGNC has such a rock-solid dividend is its choice of assets. AGNC and Annaly both almost exclusively purchase agency RMBSs. An agency security is backed by the federal government in the event of a default on the underlying asset. Although having this added protection does lower the yield AGNC can expect to receive on the agency RMBSs it buys, it also allows the company to utilize leverage to its advantage. With the understanding that the lion's share of its assets are protected from default, AGNC can borrow capital to pump up profits in what should be the sweet spot of its growth cycle.
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Altria Group: 7.46% yield
The third ultra-high-yield stock that can help investors bring in $10,000 annually on a $114,000 investment is tobacco stock Altria Group (MO 1.91%). Altria may not be a household name, but its Marlboro cigarette brand controls about half of all premium cigarette market share in the U.S.
There's no denying that tobacco sales growth isn't what it used to be. With the dangers of long-term tobacco use known, adult cigarette use rates have fallen precipitously for five decades. Despite this trend, Altria is still doing quite well. The addictive nature of nicotine has afforded the company exceptional pricing power for its Marlboro brand. Ideally, we'd like to see Altria's volume drive growth. However, consumer price inelasticity toward tobacco products has led to modest growth for the company.
But don't think Altria is satisfied simply raising the price on traditional tobacco products. The company is constantly looking for new ways to market next-generation smokeless products or push into new revenue channels. For example, Altria invested $1.8 billion into Canadian marijuana stock Cronos Group in March 2019 to secure a 45% equity stake in the company. The expectation is that Altria will aid Cronos in the development of derivative cannabis products, such as vapes.
With management aiming to return a significant portion of company earnings to investors via dividends and share repurchases, Altria remains a very shareholder-friendly stock.
