Your eyes are not deceiving you: It's been a bad year for investors. Since hitting their all-time highs between mid-November and early January, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have plunged by as much as 22%, 26%, and 35%, respectively, through Oct. 12. To boot, the bond market, which is traditionally viewed as a safe haven, is having its worst year in decades.
But amid this tumult is a silver lining. Every single stock market correction and bear market throughout history has represented a buying opportunity for patient investors. That's because all of the major U.S. stock indexes eventually recoup their losses and push to new highs, courtesy of a bull market.
In other words, it's not a matter of if you should be a buyer right now; it's simply figuring out what stocks you should buy. The most logical answer to that question might be dividend stocks.
Image source: Getty Images.
Supercharged dividend stocks can be your golden ticket to triple-digit returns
Companies that pay a regular dividend are almost always profitable and time-tested. Even more important, income stocks have an extensive history of handily outperforming their non-paying peers.
In 2013, J.P. Morgan Asset Management released a report that compared the returns of publicly traded companies that initiated and grew their payouts over four decades (1972-2012) to stocks that didn't pay a dividend over the same period. The result? The dividend stocks scampered to an average annual return of 9.5% over 40 years. The non-dividend stocks struggled to a meager 1.6% annualized return during the same four-decade stretch.
In an ideal world, investors would receive the highest yield possible with the least amount of risk. But studies have shown that risk and yield tend to correlate above 4%. In short, high-yield stocks can often be more trouble than they're worth.
But this isn't always the case. With proper vetting, stocks with high yields or ultra-high-yields (an arbitrary term I'm using to describe stocks with yields of 7% or above) can deliver truly impressive returns for long-term investors. What follows are three ultra-high-yield dividend stocks that have the capacity to turn an initial investment of $400,000 into $1 million, including dividends paid, by 2027.
AGNC Investment: 18% yield
The first passive-income powerhouse that can help investors generate a 150% return, including dividends paid, by the end of 2027 is mortgage real estate investment trust (REIT) AGNC Investment (AGNC 0.97%). AGNC pays its dividend on a monthly basis, and that 18% yield isn't a typo! In fact, the REIT averaged a double-digit yield in 12 of the past 13 years.
Without getting too technical, mortgage REITs are companies that want to borrow money at the lowest short-term lending rate possible and use this capital to buy higher-yielding long-term assets, such as mortgage-backed securities. It's how the industry got its name: mortgage REITs. The goal for mortgage REITs is to widen the gap (known as net interest margin) between the average yield from owned assets minus their average borrowing rate.
At the moment, things just about couldn't be worse for mortgage REITs. The Fed's hawkish monetary policy has caused short-term borrowing rates to soar. Meanwhile, the interest-rate yield curve has inverted. The end result being a reduction in book value for AGNC -- mortgage REITs' share prices usually stay close to their book value -- and a narrowing of its net interest margin.
However, mortgage REITs have a reputation for being excellent bad-news buys. For instance, consider that the U.S. economy spends a disproportionate amount of time expanding, relative to contracting. This suggests the yield curve will spend a lot more time sloping up and to the right, with longer-dated bonds having higher yields than short-term bonds. This is a recipe for expansion in net interest margin.
AGNC Investment should also benefit from higher interest rates over time. While Fed policy has raised short-term borrowing costs, it's also providing a boost to the yields on the mortgage-backed securities that AGNC continues to buy. That's another catalyst to expand its net interest margin over the long run.
The REIT's investment portfolio is another selling point. Based on preliminary third-quarter results from the company, it ended September with an investment portfolio totaling $61.5 billion, of which only $1.7 billion was non-agency or credit-risk transfer assets. Almost the entire portfolio is comprised of agency assets, which are protected by the federal government in the event of default. There's quite a bit of safety built into AGNC's supercharged yield.
Innovative Industrial Properties: 7.74% yield
A second ultra-high-yield dividend stock that can turn a $400,000 initial investment into $1 million, including dividends paid, over the next five years is marijuana-focused REIT Innovative Industrial Properties (IIPR -0.17%), or IIP for short.
IIP is just like any property-focused REIT in that it aims to purchase facilities that it can lease out for lengthy periods and reap the rewards of rental income. The only difference is that IIP specifically buys medical marijuana cultivation and processing facilities in legalized states. Approximately three-quarters of all states have legalized medical cannabis in some capacity.
As of early September, Innovative Industrial Properties owned 111 properties covering 8.7 million square feet of rentable space in 19 states. Best of all, 99% of its tenants were paying their rents on time as of the end of June. The reason investors love REITs so much is that they usually generate very predictable cash flow.
Although acquisitions account for the bulk of IIP's sales growth, the company does have a steady organic-growth component built into its operating model. It's able to pass along inflationary rental increases to its tenants each year, and collects a 1.5% property management fee from its tenants that's based on this ever-increasing base rental rate.
But the most intriguing aspect of IIP might just be that the lack of federal progress on cannabis reform has helped it gain new business. As long as marijuana remains illegal at the federal level, access to credit markets for pot companies will be spotty at best. Innovative Industrial Properties has stepped in to buy facilities with cash. It then leases these properties back to the seller. This win-win sale-leaseback agreement provides cash to cannabis companies while netting IIP long-term tenants.
If you need one more reason to be excited about Innovative Industrial Properties, consider that its quarterly payout has grown by 1,100% over the past five years.
Image source: Getty Images.
Antero Midstream: 9.11% yield
The third ultra-high-yield dividend stock that can turn $400,000 into $1 million, including dividends, by 2027 is oil and gas stock Antero Midstream (AM -0.28%). Its yield has pretty consistently hovered around double digits for the past three years.
For some folks, the idea of putting their money to work in an oil or gas stock isn't palatable. It was, after all, just 2 1/2 years ago when oil and gas demand fell off a cliff due to the pandemic, and West Texas Intermediate oil futures traded (briefly) as low as negative $40 a barrel. But this bad memory doesn't have to haunt Antero Midstream shareholders for a few key reasons.
To begin with, as the company's name implies, it's a midstream operator. This means it's an energy middleman that helps with transmission, storage, and/or processing. In this case, it works with parent company Antero Resources (AR 1.23%) to be a natural gas middleman in the Appalachia region. The key takeaway is that Antero Midstream's contracts are long term and 100% fixed-fee. This completely insulates the company from the effects of inflation and wild spot-price fluctuations in natural gas.
The other important component to having fixed-fee contracts is that it produces transparent, predictable cash flow. Predictability is paramount for midstream providers as it allows them to set aside capital for new infrastructure projects and acquisitions without adversely affecting their distributions or profitability.
Something else to note about Antero Midstream is that it's expected to increase profits and incremental free cash flow by mid-decade. Last year, Antero Resources announced plans to increase drilling on acreage owned by Antero Midstream, which responded by purposely reducing its payout by 27% to ensure it would have adequate capital to build out new infrastructure. While this might sound counterproductive for income seekers, the reduced yield is still a hearty 9.1%, and the expectation is for $200 million in extra incremental free cash flow for Antero Midstream by 2025. This represents a catalyst for shares of the company.
Lastly, global and domestic supply chain challenges remain favorable for energy stocks. Underinvestment during the pandemic, coupled with Russia's invasion of Ukraine, makes it unlikely that oil and gas supply can be increased significantly anytime soon. Higher spot prices will only encourage more drilling and increase the need for energy infrastructure.
