There are a lot of successful moneymaking strategies on Wall Street. However, buying dividend stocks might just be the smartest move -- especially if you're a long-term investor.
Back in 2013, J.P. Morgan Asset Management, a division of JPMorgan Chase, released a report that compared the performance of companies that initiated and grew their dividend to companies that didn't pay a dividend over a 40-year stretch (1972-2012). The result? Dividend-paying stocks delivered an annualized return of 9.5%, which ran circles around the non-dividend payers, which trudged to an annualized gain of 1.6% over four decades.
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These results aren't surprising in the least. Companies that are consistently profitable, time-tested, and have a clear long-term outlook are more likely to pay a dividend. We'd expect stable businesses to increase in value over time.
The biggest challenge for income investors is weighing yield and risk. In a perfect world, income investors would net the highest yield possible with the least amount of risk. However, data has shown that higher-yielding stocks can be more trouble than they're worth. Since yield is a function of payout relative to share price, a struggling business with a falling share price can lure investors in with a high yield but ultimately be a terrible investment (what's known as a "yield trap").
But not all ultra-high-yield dividend stocks are bad news. I'm arbitrarily defining an "ultra-high-yield dividend stock" as a company offering a 7% or higher annual yield.
The following trio of ultra-high-yield stocks offer excellent value, modest long-term growth opportunity, and they're all screaming buys in 2022.
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Enterprise Products Partners: 7.9% dividend yield
The first ultra-high-yield income stock that's begging to be bought this year is oil and gas company Enterprise Products Partners (EPD -1.86%). Enterprise Products Partners is parsing out a nearly 8% yield and is working on a streak of increasing is base annual payout for each of the past 23 years.
For some income seekers, the idea of putting their money to work in an oil stock after watching what happened in 2020 might cause indigestion. After all, the pandemic led to a huge demand drawdown for crude oil.
However, Enterprise Products Partners isn't like your typical oil or gas stock that was clobbered by falling energy prices. It's a midstream company, which means it owns the pipeline moving energy assets (over 50,000 miles' worth), as well as the storage space for crude and natural gas. It also has well over a dozen natural gas processing facilities.
Operating as a midstream company has its advantages. The most important being the structure of the contracts Enterprise Products Partners sets up with drilling and exploration companies. These contracts lay out volume commitments with regard to transmission, storage, and processing. In other words, even as the price of crude oil and natural gas vacillates, Enterprise Products Partners has a clear outlook with regard to its expected cash flow for the year. This transparent outlook is important for a company that wants to continually invest in new infrastructure projects without adversely affecting its high-yield payout.
Additionally, at no point during the pandemic did we see the company's distribution coverage ratio (DCR) fall below 1.6. The DCR measures the company's annual distributable cash flow to what's actually paid to shareholders. A DCR below 1 would imply an unsustainable payout. If Enterprise Products Partners didn't have to worry about its payout when West Texas Intermediate crude was below $30 a barrel, investors certainly don't have to worry now.
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Mobile TeleSystems: 12.9% dividend yield
Another ultra-high-yield dividend stock that looks like a screaming buy in 2022 is telecom giant Mobile TeleSystems (MBT), which is better known as MTS.
Keep in mind that while MTS does have the highest yield of the trio of stocks I'm discussing here (almost 13%), its twice-a-year payout will fluctuate based on its operating performance. Over the past five years, income investors have consistently enjoyed a yield ranging from 7% to 11% with MTS.
Telecom stocks are often a good bet to line dividend-seeking investors' pockets, and MTS is no exception. The company is one of the largest wireless providers in Russia, and it's continued to benefit from 4G LTE expansion opportunities in more rural settings of its home market.
But the most exciting growth opportunity for MTS' telecom segment is the rollout of 5G. Since it took a decade for wireless providers to demonstrably upgrade download speeds, MTS should benefit from a multiyear device upgrade cycle. This will put more retail revenue in the company's pockets, as well as boost wireless operating margins as subscribers consume more data with faster download speeds.
What separates Mobile TeleSystems from most other stodgy telecom stocks is its venturing into new, faster-growing verticals. The company is now involved in banking (MTS Bank), cloud services, and paid/streaming television, among other revenue channels.
To provide some context, MTS' third-quarter investor presentation points out that mobile service revenue grew a modest 4.2% from the year-ago quarter. Comparatively, "revenue beyond connectivity" has grown 24% year over year through the first nine months of 2021. This growth has been particularly strong among streaming, with over-the-top subscribers nearly doubling to 3.5 million in Q3 2021 from 1.8 million in the comparable quarter of 2020. The point here is that these ancillary revenue channels will provide a lift to MTS' operating results, and likely improve loyalty to the Mobile TeleSystems brand.
Valued at less than 9 times Wall Street's consensus earnings per share for 2022, Mobile TeleSystems screams "bargain!"
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Annaly Capital Management: 11.1% dividend yield
The third ultra-high-yield dividend stock that jumps out as a screaming buy in 2022 is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY -2.28%). Annaly is paying out an eye-popping 11% yield, has doled out over $20 billion in payouts since its inception 25 years ago, and has averaged around a 10% yield for the past two decades.
The mortgage REIT industry might sound complex, but it boils down to some easy-to-understand ideas. Mortgage REITs want to borrow money at the lowest possible short-term rate and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS) -- thus, why they're called mortgage REITs. The goal is to maximize their net interest margin, which describes the percentage difference between the average yield from their asset portfolio and their average short-term borrowing rate.
Even though Wall Street hasn't been excited about mortgage REITs for nearly a decade, the industry is right in the sweet spot of its expansion cycle. Looking back to 1960 and the previous eight recessions (not including the pandemic-induced recession of 2020), we see that a steepening yield curve almost always coincides with a rebounding economy. This "steepening" involves the gap in yield between short- and long-term Treasury bonds widening. When this happens, mortgage REITs like Annaly often benefit from higher net interest margin.
Another factor to consider is that Annaly does well when the nation's central bank lays out its monetary objectives clearly and makes slow, deliberate changes to its approach. Though the Federal Reserve raising rates in 2022 could very well increase short-term borrowing costs, a methodical approach to raising rates (i.e., 25 basis points every three months) will allow Annaly and its peers plenty of time to adjust their asset portfolios to maximize profits.
Lastly, Annaly has 92% of its asset portfolio tied up in agency securities, as of the end of September. Agency assets are protected in the event of default by the federal government. The safety provided by owning agency MBSs allows Annaly to use leverage to its advantage.
Currently trading at below book value, Annaly looks like a smart way for income investors to put high inflation in its place.
