The great thing about Wall Street is that there's no one size fits all investing strategy. Whether you favor growth, value, or income stocks, there's a pathway to build wealth over time.
Then again, there's no denying the outperformance that dividend stocks have demonstrated over the long run.
In 2013, J.P. Morgan Asset Management, a division of money-center giant JPMorgan Chase, released a report that looked back at 40 years' worth of data and compared the performance of publicly traded companies that initiated and grew their payouts to companies that didn't pay a dividend. The results were night and day. Companies that initiated and grew their payouts averaged an annualized return of 9.5% between 1972 and 2012. Comparatively, the non-dividend stocks eked out annualized gains of only 1.6% over the same period.
These results shouldn't surprise you. Companies that pay a dividend tend to be profitable on a recurring basis, and they typically have time-tested operating models. In other words, these are companies that have seen their fair share of economic contractions and come out stronger on the other side.
But even though dividend stocks have a propensity to outperform, they come with a catch. Once they hit high-yield territory (a yield of 4% or above), risk and reward often correlate. Since yield is a function of payout relative to share price, a struggling company with a plunging share price could lure in unsuspecting income investors and trap them in a terrible situation.
The good news is that quality high-yield and ultra-high-yield stocks do exist. "Ultra-high-yield" being an arbitrary term I'm using to describe income stocks with yields of 7% or higher. If you're after above-average dividend income that'll put high inflation in its place, a trio of dividend stocks can do just that.
With an average yield of 9.25%, this ultra-high-yield stock trio can deliver $2,500 in annual income from an initial investment of just $27,100 (split evenly three ways).
AGNC Investment Corp.: 9.81% yield
The first ultra-high-yield stock investors can trust to generate mountains of income is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 0.43%). AGNC was sporting a nearly 10% yield, as of Feb. 1, and it's averaged a double-digit yield in 12 of the past 13 years.
Although the securities mortgage REITs purchase can sometimes be a bit complex, AGNC's operating model is incredibly straightforward and transparent. Companies like AGNC seek to borrow money at lower short-term lending rates and use this capital to purchase mortgage-backed securities (MBS) with higher long-term yields. The average yield generated from these MBSs minus the average borrowing rate equates to the net interest margin (NIM). Generally, the wider the NIM, the more profitable the mortgage REIT.
As you might imagine, a business dependent on MBSs and borrowing rates generally favors a low interest rate environment. Thus, the Federal Reserve's newly hawkish stance has some folks on edge about mortgage REITs. However, the important thing to note is that the nation's central bank is slow-stepping its monetary policy moves and clearly outlining its plan. In doing so, companies like AGNC have time to adjust their portfolios to maximize profits. In other words, even though the prospect of higher interest rates is having a temporarily negative impact on AGNC's book value, it'll actually be a positive in that MBS yields should rise over time.
Furthermore, AGNC Investment almost exclusively purchases agency assets. An "agency" security is backed by the federal government in the event that an asset defaults. While this added protection does weigh down the yield that AGNC nets when purchasing an agency asset, it also allows the company to deploy leverage to increase its profit potential.
With AGNC trading at 7% discount to book value and parsing out a hearty $0.12/share dividend every month, it's the perfect way for income seekers to generate serious income.
Sabra Health Care REIT: 9.01% yield
A second ultra-high-yield stock that can line investors' pockets with dividend income is Sabra Health Care REIT (SBRA -0.43%). Sabra's yield inched ever-so-slightly above 9% as of the close of trading on Feb. 1.
As of the end of September, Sabra operated 421 real estate properties with a primary focus on skilled nursing facilities and senior housing communities. As you can probably guess, Sabra Health Care has been hammered by the coronavirus pandemic. With the elderly among the most susceptible groups to COVID-19, occupancy in many of its skilled nursing and senior housing facilities shrunk considerably in 2020 or early 2021.
However, vaccination rates have been steadily climbing for both seniors and the staff at these facilities. Excluding the company's one sizable non-accrual account (Avamere), average occupancy for Sabra's seven other leading skilled nursing operators has jumped more than 700 basis points since December 2020. Likewise, the company has seen a 465-basis-point improvement in the senior housing average occupancy rate since the February 2021 trough.
While concerns about Avamere, which leases 27 facilities from Sabra, are palpable, it's worth noting that 99.7% of forecasted rents have been collected between the beginning of the COVID-19 pandemic and the end of October 2021. With occupancy rates on the mend, Avamere is unlikely to be a long-term issue for Sabra Health Care.
What's more, the company has remained aggressive on the investment front. Through the first nine months of 2021, Sabra put nearly $397 million to work via investments, with a weighted-average cash yield of 7.55%. These substantive yields are what should easily fuel this company's 9% payout.
Antero Midstream: 8.94% yield
A third ultra-high-yielding stock that could help investors generate inflation-topping income in 2022 is Antero Midstream (AM -1.96%). Even with a dividend cut in 2021 (I'll touch on this cut in a moment), Antero Midstream is doling out a yield of nearly 9%.
For some folks, the idea of putting their money to work in oil stocks will be unappetizing. The wounds are still fresh from the historic demand drawdown that upstream drilling and exploration companies experienced during the height of the coronavirus pandemic.
But Antero Midstream is a different beast altogether. Whereas parent company Antero Resources (AR -0.28%) handles the drilling and exploration, Antero Midstream operates 468 miles of transmission pipeline and 3.2 billion cubic feet of natural gas compression capacity. While upstream drillers ebb-and-flow with the price of crude, midstream providers enjoy the predictability of cash flow that comes with fixed-fee contracts.
As for Antero's quarterly distribution being cut by 27% last year, there's a very good reason behind it. Antero Resources will be increasing its natural gas drilling activity on Antero Midstream's acreage. In response, Antero Midstream will be diverting some of its previously dedicated distribution capital to new infrastructure projects (i.e., pipelines, storage, and processing). These new projects are expected to add $400 million in incremental free cash flow through the midpoint of the decade.
With the price for natural gas surging, the table is set for both the parent company and midstream provider to thrive for years to come.