While there are a lot of ways to build wealth on Wall Street, putting your money to work in dividend stocks is among the most effective.
In 2013, J.P. Morgan Asset Management, a division of money-center bank JPMorgan Chase, compared the performance of companies paying a dividend to non–dividend-paying stocks over a four-decade stretch (1972–2012). The results showed that the dividend-paying stocks absolutely crushed their non–dividend-paying peers on an annual return basis over 40 years: 9.5% versus 1.6%.
Because dividend companies are usually profitable and time tested and have relatively transparent long-term outlooks, their stocks are typically smart places for investors to put their money to work to build wealth over time.
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But it's important to understand that no two dividend stocks are created alike. In an ideal world, income investors would be able to collect the highest yield possible with the lowest amount of risk. Unfortunately, studies have shown that realized yield and risk tend to be correlated once you hit high-yield territory (4% and above).
For example, yield is simply a function of a company's payout relative to its share price. If a business is struggling and its share price has been halved, the company's yield will double, assuming the payout remains the same. In a number of instances, high-yield and ultra-high-yield dividend stocks (companies I'm arbitrarily defining as having yields of 7% or higher) prove to be more trouble than their dividends are worth.
Yet amid the dozens of ultra-high-yield stocks income investors can buy are three, yielding an average (yes, an average!) of 10.29%, which stand out as trustworthy. This means if you want $10,000 in yearly dividend income, you don't even need to invest $100,000 (split equally) in this trio. An initial investment of $97,200, as of the close of business on Feb. 8, would net just over $10,000 in dividend income over the next 12 months.
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Annaly Capital Management: 11.61% yield
The first ultra-high-yield dividend stock you can buy hand over fist if you want a mountain of annual dividend income is Annaly Capital Management (NLY -0.32%). Annaly has paid out more than $20 billion in dividends since its inception in 1997, with the company averaging an annual yield of around 10% over the past 20 years. In other words, a very high yield has become the expectation for the company's shareholders.
Annaly Capital Management is a mortgage real estate investment trust (REIT). In layman's terms, this means the company is looking to borrow capital at low short-term rates and use this money to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBSs). The wider the gap between the yield received from MBSs minus the average borrowing rate (this "gap" is known as net interest margin), the more profitable the mortgage REIT.
Despite Wall Street shunning mortgage REITs for what seems like a decade and counting, the industry has entered what's usually the sweet spot of its growth cycle. Looking back at multiple recessions, it's normal for the interest rate yield curve to steepen as the U.S. and global economies recover. By "steepen," I mean the gap between short- and long-term Treasury bond yields widens. When this happens, Annaly can typically generate a higher yield on the MBSs it purchases, which widens its net interest margin.
We're also on the cusp of a Federal Reserve tightening cycle. With inflation hitting a 40-year high of 7% in December, the nation's central bank will be looking to raise interest rates. While this tends to create a short-term downside reaction in mortgage REITs like Annaly -- i.e., higher lending rates will increase short-term borrowing costs -- it actually improves the yields Annaly receives on the MBSs it buys over the longer run.
As long as the Fed continues to slow-step and clearly outline its monetary policy changes, Annaly is in great shape to maintain a double-digit yield.
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Sabra Health Care REIT: 9.27% yield
Another piece of the ultra-high-yield puzzle that can help you bring in more than $10,000 in yearly income with an investment of less than $100,000 is Sabra Health Care REIT (SBRA -0.58%).
There's no sugarcoating that Sabra Health Care has faced big challenges over the past two years. Sabra leases out more than 400 healthcare properties, many of which are skilled nursing facilities and senior housing communities. With the coronavirus pandemic taking an especially hard toll on seniors and skilled nursing staff, occupancy rates took quite the hit.
However, we're seeing tangible signs that the worst of the pandemic is now clearly in the rearview mirror, even if new variants of COVID-19 continue to crop up. Sabra has noted that average occupancy rates for both its skilled nursing and senior housing facilities bottomed out in December 2020 and February 2021, respectively. As nationwide COVID-19 vaccination rates tick up and new medicines make it to pharmacy shelves, the pathway to normalcy moves closer.
What's more, Sabra Health Care recently dealt with the biggest gray cloud overhanging its business. Avamere, which leases 27 facilities from Sabra, has been struggling due to COVID-19. On Feb. 2, Sabra announced an amended master lease agreement with Avamere that'll reduce its rental income, but it gives the company the ability to recoup what was lost as the skilled nursing and senior housing landscape recovers. With the rental income from these 27 leases, which span nearly another decade, no longer in doubt, investors can focus on the fact that virtually all of Sabra's tenants (99.7%) are paying their rent on time.
It should be noted that Sabra Health Care hasn't been on the defensive during the pandemic, either. While it did rework its arrangement with Avamere, it also invested $397 million through the first nine months of 2021 to acquire new assets. These assets sport a hearty weighted-average cash yield of 7.55%.
With America's elderly population expected to grow dramatically over the next two decades, senior facility–focused REITs like Sabra Health Care are in the driver's seat to profit big-time.
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AGNC Investment Corp.: 9.99% yield
It's the industry so nice, I'll mention it twice! If Annaly is the Batman of mortgage REITs, AGNC Investment Corp. (AGNC -0.11%) is most certainly Robin. AGNC has maintained a double-digit yield in 12 of the past 13 years. Thus, its 9.99% yield is actually on the historical low side for the company.
The operating model described with Annaly effectively holds true for AGNC. This is a company looking to borrow at low short-term rates and use this capital to acquire 15-year and 30-year fixed MBSs with the highest yields possible. As the U.S. economy finds its footing, a steepening yield curve should work in the company's favor.
But there's more that makes AGNC Investment tick. For instance, this is a company that's almost exclusively focused on buying agency assets. An agency security is backed by the federal government in the unlikely event of default. As of the end of 2021, $79.7 billion of AGNC's $82 billion in assets were agency securities.
On one hand, the added protection accompanying agency assets does reduce the yield AGNC Investment can expect to receive from the MBSs it purchases. On the other hand, this protection is what allows the company (and Annaly Capital Management, for that matter) to deploy leverage to increase its profit potential. This leverage can come in especially handy when net interest margin is widening.
Mortgage REITs also tend to trade near their respective book values. This makes valuing the companies within the industry pretty straightforward. With shares of both AGNC and Annaly currently going for less than their book values, history would suggest they make for smart buys.
