This has been one of the most-challenging years in decades for the investing community. Through the first-half of the year, the benchmark S&P 500 delivered its worst return in 52 years! Meanwhile, the growth-dependent Nasdaq Composite shed slightly more than a third of its value from its mid-November closing high.
But no matter what the stock market throws at billionaire money managers, it's rarely enough to scare them to the sidelines. Despite heightened volatility, a number of successful billionaires have been avid equity buyers.
In particular, billionaires can't stop buying ultra-high-yield dividend stocks in an environment where the U.S. inflation rate is at a four-decade high of 9.1%, as of June 2022. An "ultra-high-yield dividend stock" is an arbitrary term I'm using to describe an income stock with a yield of at least 7%. While companies with a high yield can sometimes be more trouble than they're worth, a select group of billionaires appear enamored with the following three ultra-high-yield dividend stocks.
Annaly Capital Management: 13.6% yield
The first passive-income powerhouse that at least one billionaire money manager can't stop buying is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY -0.72%). Annaly offers the highest yield among the companies discussed here at 13.6%, and has averaged a yield of around 10% for the past two decades.
During the first quarter, billionaire Jim Simons of Renaissance Technologies was an aggressive buyer of shares of Annaly. All told, Simons added 1.57 million shares, which increased RennTech's stake in the company by a cool 195% from the end of 2021.
Although the products Annaly buys can be complicated, the mortgage REIT operating model is really easy to understand. Mortgage REITs aim to borrow money at the lowest rate possible and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities. The difference between the average yield mortgage REITs receive from the assets they own, minus their average borrowing rate, is known as their net interest margin. The higher the net interest margin, usually the more profitable the mortgage REIT.
The great thing about mortgage REITs is they rarely, if ever, offer surprises. If you keep a close eye on the interest rate yield curve and Federal Reserve monetary policy, you'll often have a really good idea of how well or poorly the industry is performing. At the moment, things are challenging for Annaly. The yield curve has flattened or, at times, inverted, and monetary policy has turned hawkish, which has increased short-term borrowing costs.
However, history has often shown that buying mortgage REITs when they look their bleakest is a smart move. As an example, the interest rate yield curve spends a disproportionate amount of time steepening, not flattening. Plus, higher interest rates will ultimately be a positive for the yields on the MBSs Annaly buys in the future.
What's more, Annaly Capital Management almost exclusively buys agency assets. "Agency" securities are backed by the federal government in the event of default. Although this added protection does lower the yields Annaly receives on the MBSs it buys, it also allows the company to prudently deploy leverage to pump up its profits.
Innovative Industrial Properties: 7.24% yield
A second ultra-high-yield dividend stock that one successful billionaire can't stop buying is cannabis-focused REIT Innovative Industrial Properties (IIPR -0.01%). Though IIP, as the company is more commonly known, has the "lowest" yield on this list, it should be noted that its quarterly payout has grown by 1,067% over the past five years.
The billionaire that fancied IIP during the first quarter was none other than Citadel's Ken Griffin. No asset management company required to file a 13F purchased more shares of IIP in the first three months of the year (a little over 296,000 shares) than Ken Griffin's Citadel. The move increase Citadel's stake in IIP to almost 305,000 shares.
The cannabis REIT operating model is pretty similar to a typical property REIT. In this instance, IIP seeks to acquire marijuana cultivation and processing facilities, and leases these assets out for an extended period of time. While the company generates the bulk of its growth from acquiring new properties, it does have a modest organic growth component built in. It passes along inflationary increases to its tenants on an annual basis, as well as collects a property management fee that's tied to the base annual rental rate.
In theory, the beauty of Innovative industrial Properties' business model is that it's highly predictable. As of the end of June, it owned 111 properties spanning 8.6 million square feet of rentable space in 19 states. Earlier this year, the company noted that its average-weighted lease length was more than 16 years. In other words, operating cash flow should be highly predictable.
But last week we learned that surprises can and do occur in the REIT space. In a filing with the Securities and Exchange Commission, IIP announced that its fourth-largest tenant, Kings Garden, had defaulted on its July rental payment. On one hand, this could be an isolated incident, and IIP remains in talks with Kings Garden to perhaps move its lease to another multi-state operator (MSO). On the other hand, it could represent the beginning of serious issues with U.S. MSOs. For the moment, my money is on the former.
Interestingly, Innovative industrial Properties also benefits from the lack of cannabis banking reform at the federal level. Its sale-leaseback program buys properties for cash and immediately leases said properties back to the seller. The sale-leaseback program provides cash to MSOs, while netting IIP long-term tenants.
Altria Group: 8.42% yield
A third ultra-high-yield dividend stock that billionaires can't stop buying is tobacco giant Altria Group (MO -0.05%). Thanks to its superior dividend, Altria has been one of the top-performing stocks, on a total return basis, over the past half-century.
Israel Englander of Millennium Management is the billionaire in question who can't stop gobbling up shares of Altria. Based on first-quarter 13F filings, Englander's fund added more than 1.74 million shares to its existing position. For context, Millennium's stake in Altria Group stood at just 121,429 shares at the end of 2021.
There's little denying that the growth heyday for tobacco stocks has come and gone. A company like Altria, which is focused on the U.S. market, is facing an uphill battle. Improved consumer education regarding the negative long-term effects of using tobacco, coupled with stringent advertising regulations, has reduced the adult smoking rate in the U.S. by roughly two-thirds since the mid-1960s.
Nevertheless, Altria Group still has growth initiatives up its sleeve. For instance, few industries offer the incredible pricing power that tobacco stocks bring to the table. Nicotine, which is found in tobacco products, is an addictive chemical. This makes it relatively easy for a company like Altria to raise the price of its premium Marlboro brand cigarettes without facing any consumer pushback.
Altria is also positioning itself to succeed in a world where smoking alternatives thrive. While its investment in vaping company Juul hasn't worked out as planned, Altria may have the opportunity to seek additional vape partnerships or create its own vape products.
Additionally, Altria took a 45% equity stake in Canadian marijuana licensed producer Cronos Group in March 2019. Even though Cronos has struggled due to the U.S. government failing to pass federal legalization reforms, Altria appears well-positioned to aid Cronos with marketing, distribution, and product development if and when marijuana is legalized at the federal level.
Yes, Altria's best days are behind it. But with exceptionally strong pricing power, ample capital to invest in smoking alternatives, and a generous capital return program, it's a company that can continue to deliver modest returns for long-term investors unafraid of investing in a vice stock.