This has been a rough year for investors of all walks. The bond market has produced its worst year on record, while the benchmark S&P 500 delivered its weakest first-half return since 1970. Things have been even worse for the tech-driven Nasdaq Composite, which peaked at a decline of 38% from its November 2021 high.
While bear markets can be unnerving and are known to test the resolve of investors, they can also be a great time to put your money to work in time-tested businesses. In particular, dividend stocks can be a smart buy during sizable downturns.
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Companies that regularly pay a dividend to their shareholders are typically profitable on a recurring basis. What's more, history shows that income stocks have a knack for handily outperforming companies that don't pay a dividend over multiple decades.
In an ideal world, income investors would generate high yields with minimal risk. But in the real world, studies show that risk and yield tend to go hand-in-hand once income stocks hit high-yield status (a 4% or greater yield). It means high-yield dividend stocks can sometimes be more trouble than they're worth.
However, not all high-yield stocks are bad news. In fact, some can be fantastic investments from an income and share price-appreciation perspective. What follows are three high-yield dividend stocks that have the capacity to turn a $333,000 investment into $1 million by 2032, inclusive of payouts.
Walgreens Boots Alliance: 4.72% yield
The first supercharged income stock that can effectively deliver a 200% total return, including payouts, by 2032 is pharmacy chain Walgreens Boots Alliance (WBA -0.06%). Walgreens has increased its base annual payout for 47 consecutive years and is currently parsing out a 4.7% yield.
Whereas most healthcare stocks are relatively immune to economic downturns, the COVID-19 pandemic proved to be an exception to the rule for Walgreens. Since this is a company that relies heavily on foot traffic into its stores, initial lockdowns tied to the pandemic really sapped its business. Thankfully, this short-term weakness has given income investors an incredible opportunity to scoop up shares of Walgreens Boots Alliance on the cheap.
Walgreens is already multiple years into a turnaround plan that it believes can improve its operating margins and boost its organic growth rate. Though it's reduced its annual operating expenses by more than $2 billion, it's where the company is putting its cash to work that should have investors excited.
The biggest eyebrow-raiser is Walgreens' joint venture with VillageMD -- Walgreens is a majority owner of VillageMD. The two have opened 152 co-located, full-service health clinics, as of Aug. 31, 2022. The expectation is for 1,000 of these physician-staffed clinics to be open in over 30 U.S. markets by the end of 2027. Since these clinics can handle far more than just a cough, sniffle, or vaccination, they're well-positioned to bring in repeat patients at the grassroots level.
The pandemic also served as a reminder that Walgreens needs to reinvest in its direct-to-consumer platform. Even though the company's in-store retail and pharmacy operations will continue to generate the bulk of its revenue, Walgreens wisely recognizes the importance of online sales convenience. Digital sales should continue to climb by a double-digit percentage and reignite Walgreens' organic growth.
Innovative Industrial Properties: 6.32% yield
A second high-yield dividend stock with the capacity to turn a $333,000 initial investment into a cool $1 million over the next decade is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR -0.92%). IIP, as the company is also known, is paying an inflation-fighting 6.3% yield and has grown its quarterly dividend by 1,100% since September 2017.
IIP is like any other property-based REIT: It wants to acquire assets that can be leased for long periods. The difference is it's acquiring medical marijuana cultivation and processing facilities in states where growing and prescribing medical cannabis is legal. As of Sept. 30, 2022, it owned 111 properties spanning 8.7 million square feet of rentable space in 19 states.
One reason the REIT operating model is so beloved by income seekers is that it delivers highly predictable operating cash flow. Through the first nine months of the year, Innovative Industrial Properties had collected 97% of its rent on time. Being able to accurately forecast the company's cash flow has played a key role in its property acquisition strategy and dividend growth.
To add to the above, 100% of the company's operating portfolio is triple-net leased (sometimes known as "NNN" leased). Triple-net properties require tenants to cover all outstanding expenses, including utilities, maintenance, and even insurance and property taxes. Though rental rates are often lower for triple-net leases, this structure of lease removes virtually all cost surprises from the equation for IIP.
The other big catalyst for Innovative Industrial Properties is its sale-leaseback program. As long as marijuana remains a federally illicit substance, access to basic financial services will be limited (at best) for pot stocks. IIP has resolved this issue by purchasing assets with cash and immediately leasing these properties back to the seller. This program has netted IIP a number of long-term tenants.
With cannabis looking like one of the fastest-growing industries of the decade, IIP could realistically triple your initial investment.
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Alliance Resource Partners: 9.01% yield
The third high-yield dividend stock that can turn $333,000 into $1 million by 2032, including dividends paid, is coal producer Alliance Resource Partners (ARLP 0.59%). At 9%, it has the juiciest yield on this list.
Like most energy stocks, Alliance Resource Partners was taken to the woodshed in 2020 when initial COVID-19 lockdowns occurred and demand for energy commodities, including coal, fell off a cliff. But this proved to be short-lived, and now a multiyear period of expansion awaits.
One of the biggest factors working in Alliance Resource's favor is the world's broken energy supply chain. To begin with, the pandemic led energy companies to substantially reduce their capital investments. This was followed in February 2022 by Russia invading Ukraine, which has created oil and gas supply uncertainty throughout much of Europe. With no immediate resolution for global supply woes, energy commodity prices have soared. This includes coal, with Alliance Resource Partners recognizing a coal sales price of almost $60 on a per-ton basis in the third quarter (up 40.5% from the prior-year period). Elevated coal prices should be sustainable throughout much of the decade.
Another reason Alliance Resource Partners makes for such a smart buy is its management team. The company's execs have erred on the side of caution and conservatively expanded production in the past -- i.e., the company's balance sheet has far better financial flexibility than other coal stocks. What's more, management encourages locking in price and volume commitments multiple years in advance. With a significant amount of its future production spoken for, Alliance Resource's cash flow can be accurately forecast.
Something else to consider is that the company holds oil and natural gas royalties. If the sales price of oil and natural gas rises, and the number of oil equivalent barrels sold climbs, segment profit should increase. This is precisely what's happened in 2022, thanks in part to the aforementioned broken energy supply chain.
Currently valued at less than 4 times Wall Street's forecast earnings in 2023, Alliance Resource Partners looks like an absolute steal.
