Among the many successful strategies investors can choose from, perhaps none has a better track record than buying dividend stocks.
In 2013, J.P. Morgan Asset Management, a division of JPMorgan Chase, released a study that compared the performance of publicly traded stocks paying a dividend to those not offering a payout over a four-decade stretch (1972-2012). The results showed that income stocks mopped the floor with the non-dividend payers. With an average annual return of 9.5%, the dividend stocks doubled investors' money, on average, every 7.6 years. By comparison, the non-payers managed only a 1.6% average annual return.
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Even if we didn't know the magnitude of this 40-year outperformance, it was highly predictable that dividend stocks would leave the non-payers eating their dust. Companies that regularly pay a dividend are often profitable on a recurring basis, time-tested, and have transparent outlooks. They're just the sort of businesses we'd expect to increase in value over time, and the perfect stocks to consider buying in a turbulent market being fueled by historically high inflation.
If you were to invest $93,200 (split equally) into the following three ultra-high-yield dividend stocks -- I'm arbitrarily defining an "ultra-high-yield stock" as having a yield of 7% or above -- they could, with their combined average yield of 10.73%, produce $10,000 in annual dividend income.
AGNC Investment Corp.: 12.98% yield
The first ultra-high-yield stock that can really pad investors' pockets with passive income is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 0.89%). Not only is AGNC a monthly dividend payer, but it's rewarded its shareholders with a double-digit yield in 12 of the past 13 years.
Without getting overly complicated, mortgage REITs aim to borrow money at low short-term lending rates, and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The goal is to widen the gap between the average yield from assets owned minus the average borrowing rate. This "gap" is officially known as net interest margin.
Mortgage REITs like AGNC have been taken to the woodshed over the past couple of months for two key reasons. First, the Federal Reserve has turned hawkish and is set to raise interest rates multiple times this year. Higher interest rates should lead to an increase in borrowing rates. The second issue is the flattening of the interest rate yield curve (i.e., the gap between short-and-long-term Treasury bond yields). When the yield curve flattens, net interest margin tends to decline.
Although things aren't ideal at the moment for AGNC, history has shown that flat yield curves don't last very long. What's more, higher interest rates should have a positive effect on the yields the company receives from future MBS purchases. In other words, patient investors should witness a healthy expansion in AGNC's net interest margin.
Investors should also feel safe knowing that $79.7 billion of AGNC's $82 billion investment portfolio, as of Dec. 31, 2021, is made up of agency securities. An agency asset is backed by the federal government in the event of default. This added protection is what allows AGNC to prudently deploy leverage to boost its profit potential.
Historically, the share price of mortgage REIT stocks stay close to their respective book values. With AGNC valued at a 30% discount to its net tangible book value, it's not only a passive income powerhouse, but an absolute screaming bargain from an investment perspective.
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Sabra Health Care REIT: 10.16% yield
Another stock with a double-digit yield that can help investors score $10,000 in annual dividend income is Sabra Health Care REIT (SBRA -1.03%). Sabra has pretty consistently vacillated between a 6% and 11% yield for the past six years, which places its current 10.2% yield at the high end of its recent range.
As of the end of 2021, Sabra owned 416 healthcare facilities -- i.e., skilled nursing and senior housing communities -- in the United States. The COVID-19 pandemic was, at least initially, an absolute disaster for this company. Even though Sabra is leasing, not operating, these healthcare facilities, COVID-19 had a squarely negative impact on senior citizens. This led to declining skilled nursing and senior housing occupancy rates and the real possibility of rental payments not being made by Sabra's tenants.
However, things have improved markedly since the beginning of 2021. Senior occupancy rates in skilled nursing and senior housing bottomed out more than a year ago. As vaccination rates tick higher and COVID-19 (likely) becomes an endemic illness, occupancy rates should continue to increase. As a whole, Sabra collected 99.6% of its forecasted rents since the pandemic began.
Sabra has also reworked a master rental agreement with a core tenant (Avamere) that's struggled during the pandemic. This recently amended agreement gives Avamere some near-term breathing room, while also allowing Sabra to generate more in future rent if Avamere's operating performance picks up.
Although higher interest rates are certainly a concern for a company that leans on debt to acquire new healthcare facilities -- Sabra put $419 million to work in new investments last year -- it's equally impossible to ignore Sabra's perfect positioning as America's boomer population ages. America's boomers should propel Sabra Health Care's rental pricing power for decades to come.
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Antero Midstream: 9.05% yield
The third and final ultra-high-yield dividend stock that can generate boatloads of annual income is Antero Midstream (AM 0.44%). Antero's nearly 9.1% yield is the lowest on this list, but would still top the trailing 12-month inflation rate of 8.5% in March in the U.S.
For some investors, the idea of putting money to work in the oil and gas industry may not be appealing. Let's not forget that crude oil demand fell off a cliff due to the pandemic two years ago and briefly pushed West Texas Intermediate crude oil futures deeply into the negative. However, Antero Midstream is a completely different beast that's been immune to the wild vacillations seen in the oil and natural gas markets.
As its name implies, Antero is a midstream provider and not a driller. This is a fancy way of saying it handles the middleman work in the energy complex. Specifically, it deals with gathering, compression, processing, and water delivery for natural gas producer Antero Resources in the Appalachian Basin. Midstream providers typically rely fixed-fee or volume-based contracts, which leaves little uncertainty when it comes to annual operating cash flow. Having a transparent outlook allows midstream providers to outlay capital for infrastructure projects without impinging on profitability or a quarterly distribution.
One of the more interesting things investors might notice about Antero Midstream is that the company actually reduced its payout by 27% last year. Normally, dividend reductions would be a red flag; but not in this instance. Antero Resources has plans to increase its natural gas drilling activity on Antero Midstream's owned acreage. Reducing its distribution is simply a way for the latter to devote more capital for new infrastructure. Giving up a little in distributions now is expected to generate $400 million in incremental free cash flow by the midpoint of the decade.
In addition to an expected growth spurt, Antero Midstream has reduced its net debt by more than $1.6 billion since the end of 2019, and expects to reduce its leverage ratio from 3.1 at the end of 2020 to less than 1 by the end of this year. With natural gas prices surging and demand growing, Antero's more than 9% yield looks rock-solid.
