Investing in 2022 has been an adventure -- and that's putting it mildly! The first six months of the year saw the broad-based S&P 500 deliver its worst first-half return since 1970. Meanwhile, growth stocks were taken to the woodshed. The growth-centric Nasdaq Composite plunged as much as 34% from its all-time high set in November 2021.
While it's been a year that's truly tested the resolve of investors, it's also rolled out the red carpet for long-term investors to scoop up high-quality stocks at a discount. Although much of the emphasis over the past couple of years has been on rapidly growing companies, select dividend stocks have become especially attractive.
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Companies that pay a regular dividend are often profitable, time-tested, and provide transparent growth outlooks. As the cherry on top, dividend stocks have a rich history of handily outperforming stocks that don't offer a payout. Income stocks are the ideal place to consider putting your money to work in such an uncertain environment.
Of course, not all dividend stocks are created equally. What follows are three ultra-high-yield dividend stocks -- an arbitrary term I'm using to describe income stocks with yields of at least 7% -- that have the capacity to turn an initial investment of $350,000 into $1 million by 2030.
Enterprise Products Partners: 7.39% yield
The first passive-income powerhouse that can deliver a 186% return (or greater) on a $350,000 initial investment by 2030 is oil and gas stock Enterprise Products Partners (EPD 0.48%).
For some investors, the idea of putting money to work in an oil stock sends shivers running down their spine. It was just a little over two years ago that the historic demand drawdown associated with the COVID-19 pandemic sent crude oil and natural gas prices plummeting. In some instances, highly levered drilling companies lost 80% or more of their value.
However, this isn't an issue the shareholders of Enterprise Products Partners are going to deal with. That's because Enterprise Products Partners is a midstream energy company. Midstream providers are akin to the middlemen of the energy complex. They provide transmission pipelines, storage space, and processing facilities.
What makes Enterprise Products Partners such a safe energy stock is that, like many other midstream oil and gas stocks, it leans on fixed-fee contracts. There are few, if any, surprises when it comes to the company's operating cash flow in a given year. The accuracy of cash flow forecasts is imperative since it allows the company to dole out distributions, set aside capital for new infrastructure, and make acquisitions, all without adversely impacting profitability.
Speaking of new infrastructure projects, the company has in the neighborhood of $5.5 billion tied up in new or upgraded infrastructure. Many of these projects are slated to come online between the beginning of 2023 and the first-half of 2024. With domestic energy needs growing, this investment should pay off in the form of increased operating cash flow throughout the decade.
If you still need more convincing, consider that Enterprise Products Partners recently raised its base annual distribution for the 24th consecutive year since its initial public offering. With a healthy distribution coverage ratio and historically high crude prices likely to encourage drillers to increase their production, Enterprise Products Partners is perfectly positioned to thrive this decade.
Innovative Industrial Properties: 7.41% yield
A second ultra-high-yield dividend stock with all the tools needed to turn $350,000 into $1 million by the turn of the decade is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR 0.06%), or IIP for short.
Just like any property REIT, IIP is aiming to acquire assets it can rent out for long periods. In this case, IIP purchases marijuana cultivation and processing facilities and leases them for extended lengths of time. As of Aug. 3, 2022, the company owned 110 properties spanning 8.6 million square feet of rentable space in 19 legalized states. Although the company stopped reporting its average-weighted lease length earlier this year, it was north of 16 years at last check.
Although Innovative Industrial Properties generates the bulk of its revenue from making acquisitions, it does have an organic growth component built in. Every year, the company passes along inflationary rental hikes to its tenants, as well as collects a 1.5% property management fee on a monthly basis. This latter fee is tied to a tenant's base annual rental rate.
This is typically an operating model that generates transparent, predictable cash flow. But as IIP learned recently, it's not foolproof. One of the company's larger tenants, Kings Garden, defaulted on its July rental payment. IIP is in discussions with Kings Garden over the matter and has pitched the idea of leasing Kings' facilities to other multi-state operators. But even with this hiccup, IIP continues to collect rent from its multitude of tenants and is no danger of not meeting its juicy dividend payment obligations.
Speaking of dividend payments, Innovative industrial Properties has grown its quarterly payout by (drum roll) 1,067% over the past five years. While the pace of its distribution growth is likely to slow as macroeconomic headwinds take their toll, this is a hearty payout that can continue to grow at a more modest pace throughout the decade.
As a final note, Innovative Industrial Properties is liable to benefit from marijuana remaining illegal at the federal level. The company's sale-leaseback agreement allows the company to buy properties for cash and immediately lease them back to the seller. This provides much-needed cash to multi-state operators that may not have access to traditional financial services. Meanwhile, it nets IIP long-term tenants.
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AGNC Investment Corp.: 11.76% yield
The third ultra-high-yield dividend stock that can turn $350,000 into $1 million by 2030 is mortgage REIT AGNC Investment Corp. (AGNC -0.11%). AGNC has the highest yield on this list (11.8%) and has averaged a double-digit yield in 12 of the past 13 years.
While the securities mortgage REITs purchase can be somewhat complicated, their operating model is cut-and-dried. Companies like AGNC aim to borrow money at the lowest short-term rate possible and purchase higher-yield long-term assets. These higher-yielding assets are almost always mortgage-backed securities (MBS), which how this class of REITs got its name. The bigger the gap in yield (known as net interest margin) between the long-term assets held by mortgage REITs and their short-term borrow rate, normally the more profitable they are.
What makes AGNC so attractive for patient income investors is that the industry is transparent. If you keep a close eye on Federal Reserve monetary policy and the Treasury-rate yield curve, you can pretty much tell exactly how well or poorly mortgage REITs are performing.
Over the past couple of quarters, AGNC and its peers have faced an uphill battle. Historically high inflation has coerced the nation's central bank to get aggressive with interest rate, which in turn has quickly pushed up short-term borrowing costs. To add, the interest rate yield curve has flattened or, at times, inverted. These headwinds tend to weigh down AGNC's book value and narrow its net interest margin.
But the interesting thing about mortgage REITs is that they make for excellent bad-news buys. When things look their worst is often when it's the best time to buy. For example, the interest rate yield curve spends a disproportionate amount of time sloping up and to the right. The reason? The U.S. economy spends far more time expanding than contracting.
What's more, higher interest rates aren't the land mine you might think they'd be for an interest-sensitive company like AGNC. While it has hurt short-term borrowing costs, higher interest rates will ultimately raise the yields on the MBSs the company is buying. Over time, this is a recipe for wider net interest margin.
Another reason AGNC can excel is its investment portfolio. As of the end of June, $59.5 billion of its $61.3 billion in assets were agency securities. An "agency" asset is backed by the federal government in the event of default. This sweeping protection allows the company to wisely use leverage to increase its profits.
AGNC may not have the growth potential of Enterprise Products Partners or Innovative Industrial Properties, but its supercharged dividend and an improved net interest margin can pack a punch over the next eight years.
