For patient investors, there are no shortage of strategies that can successfully build wealth on Wall Street. But among these strategies, perhaps none is more fruitful than buying dividend stocks.
Nine years ago, J.P. Morgan Asset Management, which is a division of the nation's largest bank by market cap, JPMorgan Chase, released a report that examined the performance of dividend stocks to non-payers over four decades (1972-2012). During this 40-year time frame, dividend stocks averaged an annual return of 9.5%. This means investors were doubling their money every 7.6 years. Meanwhile, the non-dividend stocks trudged their way to a paltry annualized return of 1.6%.
Since companies that regularly pay a dividend are often profitable, time-tested, and have transparent growth outlooks, they're just the type of stocks investors will flock to during periods of heightened market volatility.
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The following three ultra-high-yield dividend stocks -- "ultra-high-yield" is an arbitrary term I'm using to describe income stocks with at least a 7% yield -- can all be confidently bought hand over fist by income seekers in May.
AGNC Investment Corp.: 11.6% yield
The first supercharged dividend stock that's begging to be bought in May is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 0.22%).
AGNC is a monthly dividend payer that's averaged a double-digit yield in 12 of the past 13 years. Even though the company's share price has fallen by 36% since its public trading debut 14 years ago, investors have tallied a 351% total return if you factor in the dividends paid. For some context, this 351% total return is 58 percentage points higher than the total return of the benchmark S&P 500 since AGNC became a publicly traded company.
Mortgage REITs like AGNC seek to borrow money at the lowest short-term rate possible, and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The concern at the moment, and the reason AGNC's shares have been clobbered in recent months, is that rapidly rising interest rates will increase its short-term borrowing costs. When coupled with a flattening yield curve, the company is liable to see its net interest margin (the difference between the average yield on its owned assets minus the average borrowing rate) and book value decline.
However, the headwinds AGNC is facing are historically short-term in nature. Though the yield curve has flattened, it spends far more time steepening during economic recoveries and periods of expansion. Further, AGNC should benefit from higher yields on the MBSs it purchases as interest rates rise. In other words, patient investors should witness the company's net interest margin expand in the coming years.
Another big key to AGNC Investment's success is sticking to agency securities. At the end of March, $66.9 billion of the company's $68.6 billion investment portfolio was in agency assets. An "agency" security is backed by the federal government in the unlikely event of a default. While this added protection does reduce the yield on the MBSs AGNC buys, it also allows the company to deploy leverage to boost its profit potential.
Traditionally, the shares of mortgage REITs stay close to their respective tangible net book values (TNBV). With AGNC valued at a 5% discount to its TNBV, and sporting an 11.6% yield, it looks like a screaming buy among ultra-high-yield dividend stocks.
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Sabra Health Care REIT: 9.08% yield
A second big-time income stock that can be bought hand over fist in May is Sabra Health Care REIT (SBRA -0.22%). The company's 9.1% yield is right around the midpoint of what shareholders have come to expect over the trailing five-year period.
When the March quarter came to a close, Sabra owned and leased 416 healthcare properties throughout the country. More specifically, Sabra's portfolio consists of skilled nursing facilities and senior housing communities.
As you can probably guess, Sabra struggled mightily during the initial stages of the pandemic. There were clear concerns from Wall Street and investors that the company wouldn't receive rental payments from its tenants. It also didn't help that senior citizens were being hit harder by COVID-19 than other age groups.
Thankfully, much of the worst-case scenario chatter regarding Sabra never came to fruition. Through March 2022, the company has collected 99.5% of forecasted rents since the COVID-19 pandemic began. We've also witnessed a pretty steady rebound in skilled nursing and senior housing community occupancy rates since the beginning of last year.
To build on this point, Sabra Health Care was able to amend its master lease agreement with one of its larger tenants, Avamere, in February. The newly amended agreement gives Avamere more breathing room on the payment front. Meanwhile, it allows Sabra to collect more in future rent if Avamere's operating performance significantly rebounds. With Avamere making its payments, a big gray cloud is no longer hovering over Sabra.
If you need one more good reason to trust Sabra Health Care REIT over the long haul, consider this: the boomer population is aging and is likely to require additional care in the coming years and decades. Moving forward, Sabra's rental pricing power should only improve.
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Alliance Resource Partners: 7.31% yield
The third and final ultra-high-yield dividend stock to buy hand over fist in May is coal mining company Alliance Resource Partners (ARLP -0.33%). Yes, a coal mining company.
Despite coal stocks being obliterated by high debt levels and a significant demand drawdown due to pandemic-related lockdowns, Alliance Resource Partners has thrived. Since its initial public offering (IPO) in August 1999, Alliance Resource Partners' shares have more than quadrupled. But if you factor in the company's incredible dividend, it's delivered a total return of almost 2,200% since its IPO.
Although coal stocks are facing an uphill climb given that most countries are focused on reducing their carbon footprint and fighting climate change, Alliance Resource Partners has a few advantages. For example, the company has a debt-to-equity ratio of 36.8%, which is substantially lower than its peers. Management's historically conservative spending approach has afforded Alliance Resource Partners financial flexibility at a time when many of its peers lack this luxury.
Another reason Alliance Resource Partners has been so successful is the volume and price commitments the company locks in. Through the end of March, nearly all of the company's forecast production for 2022 (35.5 million tons to 37 million tons) is spoken for. However, 19.9 million tons are locked in at specific price points for 2023 as well. During the latest quarter, the company booked production all the way out to 2025. This provides highly predictable cash flow in an industry known for wild price volatility (at least in recent years).
But there's more to Alliance Resource Partners than just coal. The company also holds royalties on oil and natural gas assets. With both crude oil and natural gas hitting multidecade highs, Alliance Resource can expect a healthy jump in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from its royalty segment.
The cherry on top of everything is that management anticipates increasing the company's distribution by 10% to 15% per quarter for the remainder of 2022. This comes after an announced 40% increase in the company's distribution following its first-quarter operating results.
Coal stocks may not be sexy investments, but Alliance Resource Partners continues to find ways to deliver for its shareholders.
