There is a myriad of investing strategies that can pay off on Wall Street. Buying dividend stocks tends to be one of the more successful ways to build wealth.
Companies that regularly dole out a dividend to their shareholders tend to be profitable on a recurring basis, are time-tested, and can provide investors with transparent long-term growth outlooks. Income stocks are rarely going to knock your socks off in the growth department, but they'll help you sleep better when volatility arises in the broader market.
What's more, dividend stocks offer a history of outperformance. A report issued by JPMorgan Chase's wealth management division in 2013 found that publicly traded companies initiating and growing their payouts between 1972 and 2012 delivered an annualized return of 9.5%. That compared to a measly 1.6% annualized return for the public companies that didn't offer a dividend over the same 40-year stretch.
Image source: Getty Images.
The biggest issue for income seekers is finding the highest yield possible with the least amount of risk. I say "issue" because studies have shown that high-yielding stocks often come with added investment risk. But this isn't always the case. With some extra vetting, high-octane dividend stocks with rock-solid yields can be found.
For example, if you want $200 in super safe annual-dividend income, all you'd have to do is invest $1,750 (split equally, three ways) into the following three ultra-high-yield stocks, which are sporting an average yield of 11.47%!
AGNC Investment: 15.14% yield
The first supercharged income stock that can pad investors' pocketbooks with regularity is mortgage real estate investment trust (REIT) AGNC Investment (AGNC 1.30%). AGNC pays its dividend on a monthly basis, which at the moment works out to an annual yield of 15.1%. Note, this isn't a fluky high yield, either. AGNC has averaged a double-digit yield in 13 of the past 14 years.
Mortgage REITs like AGNC are likely enduring the toughest market conditions since they were founded. Rapidly rising interest rates and an inverted yield curve have sent short-term borrowing costs soaring and are reducing the net-interest margin for mortgage REITs. "Net-interest margin" refers to the average yield AGNC nets from its owned assets less the average yield on what it's borrowed.
NASDAQ: AGNC
Key Data Points
However, there is light at the end of the tunnel for AGNC, and this good news should provide a lift to the company's shares sooner than later.
To begin with, the Treasury yield curve spends a disproportionate amount of time sloped up and to the right. This is a fancy way of saying that longer-dated Treasury bonds maturing in 10 or 30 years will sport higher yields than bills maturing in, say, three months or one year. A return to normalcy on the yield curve will eventually expand AGNC's net-interest margin.
Despite the yield-curve inversion weighing on AGNC's net-interest margin, there doesn't appear to be any concern about the company's robust payout. AGNC looks to be on track to deliver more than $2 in annual cash flow per share for the foreseeable future, which would, presumably, sustain its $1.44 per-share base-annual payout.
Furthermore, all but $1.1 billion of AGNC Investment's $58 billion investment portfolio is comprised of agency mortgage-backed securities and to-be-announced mortgage positions. An "agency" asset is backed by the federal government in the event of default. What this added protection does is allow AGNC to deploy leverage to bolster its profits and sustain its juicy payout.
NYSE: PFLT
Key Data Points
PennantPark Floating Rate Capital: 11.75% yield
A second ultra-high-yield dividend stock that can provide $200 in super safe annual-dividend income from an initial investment of just $1,750 (split equally, three ways) is under-the-radar business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.29%). As mere coincidence, PennantPark also pays its dividend on a monthly basis, with its base-annual yield currently a healthy 11.8%.
BDCs are companies that invest in the debt and/or equity (common/preferred stock) of middle-market businesses. By "middle market," I'm predominantly referring to small and microcap companies. Though PennantPark does have $154.9 million in equity investments in its portfolio, it's primarily a debt-focused BDC as evidenced by the $950.3 million in secured debt held at the end of June.
Being debt-focused has three key advantages that help support the company's supercharged yield.
First of all, small and microcap companies are usually unproven and rarely have full access to traditional debt and credit markets. With limited options for financing, the debt PennantPark holds in middle-market companies tends to be at above-market rates.
The second advantage has to do with PennantPark protecting its invested capital. All but $0.1 million of the company's $950.3 million in debt securities is first-lien secured debt. If one of the company's borrowers were to seek bankruptcy protection, first-lien secured debt holders are first in line for repayment. Both PennantPark's diversification (its $1.11 billion portfolio, including equity investments, is spread across 130 companies) and its focus on first-lien secured debt ensures that no one investment can upend it.
But the biggest advantage can be seen in the composition of PennantPark Floating Rate Capital's debt-investment portfolio. The company's entire $950.3 million debt portfolio sports variable rates. With the Federal Reserve conducting its most aggressive rate-hiking cycle in decades, PennantPark has seen the weighted average yield on debt investments skyrocket from 7.4% to 12.4% between September 2021 and June 2023. As long as interest rates remain elevated, PennantPark is nothing short of a cash machine.
Image source: Getty Images.
Enterprise Products Partners: 7.53% yield
The third ultra-high-yield stock that can generate $200 in super safe annual-dividend income with an initial investment of $1,750 (split equally, three ways) is energy stock Enterprise Products Partners (EPD +0.54%). Enterprise is currently parsing out a 7.5% yield but holds the distinction of increasing its base-annual distribution for 25 consecutive years. Including buybacks, it's returned nearly $50 billion to its shareholders since its initial public offering (IPO) in July 1998.
Although the operating performance of most oil and natural gas stocks has been exceptionally volatile this decade, Enterprise Products Partners hasn't shared this fate. That's because it's one of America's biggest midstream operators. In other words, it's an energy middleman that operates more than 50,000 miles of pipeline and can store more than 260 million barrels of liquids and refined product.
NYSE: EPD
Key Data Points
Enterprise's secret to success can be found in its contracts with drilling companies. Approximately three-quarters of the company's gross operating margin derives from fixed-fee, long-term contracts. The fixed-fee portion of the company's contracts removes inflation and spot-price volatility from the equation and allows Enterprise Products Partners to accurately forecast its operating cash flow each year.
The importance of cash-flow stability and predictability simply can't be overstated for midstream energy companies. In addition to maintain its existing infrastructure, Enterprise is outlaying capital for new projects (currently $4.1 billion worth of projects set to come online within the next three years), acquisitions, and its ever-growing distribution. This would all be very difficult if Enterprise's cash flow were dependent on spot-price vacillation in crude oil and natural gas.
Macroeconomic factors are also working in its favor. More than three years of capital underinvestment by energy majors during the COVID-19 pandemic, coupled with Russia's ongoing war with Ukraine, has created a tight supply market for energy commodities that could persist for years. Tight crude supply is usually a recipe for higher spot prices, which should encourage more domestic drilling. In short, it's a red-carpet opportunity for Enterprise to land more long-term, fixed-fee contracts.
