When stock prices drop, dividend yields rise, and that means gobbling up shares of dented dividend-paying stocks can be an incredibly lucrative step to take for your portfolio. In fact, if you can score a few shares of companies with ultra-high yields above 11%, there's a chance you'll be able to lock in potentially perpetual yearly gains that are above the market's long-term average annual growth of around 10%.
To accomplish that, you'd need to pick the right stock, as many businesses with high dividend yields have serious problems or similarly compelling reasons for why they probably won't be able to keep paying their dividends out consistently over time. Real estate investment trusts (REITs) tend to be the most favorable, as their cash flows typically stem from collecting debt payments from rents or mortgages, which are toward the top of their customers' list of priorities to keep paying no matter what. Let's examine a pair of recently bruised REITs with ultra-high-yielding dividends so that you'll have a couple of ideas about what might be worth buying on the dip.
1. AFC Gamma
AFC Gamma (AFCG -0.09%) is a REIT that loans money to both public and private cannabis businesses in exchange for holding their property as collateral. That's a sweet deal, as it means any borrowers in default will cede their real estate to the company, which it can then sell to break even on the outstanding balance. And with $483.2 million committed to loans and a weighted average yield to maturity of around 18% for its portfolio, the company pays a dividend that has a monster forward yield of over 12.3%. Of course, that's partially due to its shares declining 14.6% this year so far due to a combination of market turmoil and potentially wide-ranging cannabis banking reform legislation working its way through Congress.
In the long run, there will be a rising level of demand for the company's lending services as a result of the cannabis industry's expected growth, which it estimates will be as fast as around 20% per year between 2020 and 2025. Such growth will be a powerful tailwind for the stock, but it's an even more positive sign for its dividend.
In AFC's short history so far, management has shown that hiking the payout is a priority. On June 15, it announced yet another increase to its dividend, making for a 47.4% rise in the quarterly payment year over year. It won't take too long for dividend hikes at that pace to make people who invest in the stock today significantly wealthier. But don't be too surprised if this stock doesn't beat the market, as it's often a hard ask for REITs in general.
2. Annaly Capital Management
With a forward annual dividend yield in excess of 12.9%, Annaly Capital Management (NLY -0.32%) is a massive REIT, with $82.3 billion in total assets. Of that sum, $74.9 billion is invested in mortgage-backed securities for residential mortgages, all of which are guaranteed by a combination of federal organizations like Freddy Mac and Fannie Mae, and 94% of which are for standard 30-year mortgages. That makes the securities it holds much lower risk than if they were uncollateralized or not backstopped by federal entities.
Still, it's no secret that Annaly needs to be able to borrow money to grow. After it borrows the money, it then needs to invest it into income-bearing assets at a higher rate than the rate at which it borrowed; as of the second quarter, the difference between its interest income and its interest expense was 2.2%, an increase of 0.16% from the prior quarter. Despite this improvement, the ongoing drama with inflation and the Federal Reserve's interest rate hikes to control it tend to play quite badly for its stock, and in the last 12 months, it fell by nearly 10.9% on the anticipation of costlier borrowing conditions. Nonetheless, management is sanguine, commenting that higher interest rates make for a reduced incentive for many homeowners to refinance and that the consistency of its cash flows is as strong as it's been in quite a while.
And if you're more interested in capturing a dividend income stream than outperforming the market, it won't be a big problem if the company's share price stays at a lower level for a few years due to the market's pessimism about the returns it makes on its mortgage-backed securities. Just be aware that Annaly has a history of slashing its dividend when times get tough.