Though there are a lot of ways to put your money to work on Wall Street, buying and holding dividend stocks over the long run is certainly one of the more effective ways to build wealth.
Approximately 10 years ago, JPMorgan Chase unveiled a study that compared the performance of publicly traded companies that initiated and grew their payouts to public companies with no dividend over a period of 40 years (1972 to 2012). Unsurprisingly, the income stocks clobbered the non-payers to the tune of an annualized return of 9.5% versus 1.6% for those without a dividend.
Companies that regularly pay a dividend to their shareholders tend to be profitable on a recurring basis, can offer transparent long-term growth outlooks, and are often time-tested. In other words, they're just the type of businesses we'd expect to grow in value over multiple years and decades.
Among the many categories of businesses known for their robust payouts, real estate investment trusts (REITs) are near the top of the list. REITs are businesses that invest in real estate to generate sustained rental income or fixed income from the interest earned on real estate-backed securities.
Image source: Getty Images.
The great thing about REITs is that they avoid corporate tax rates. But in order to maintain their status as a REIT, they're required to return most of their earnings to their shareholders in the form of a dividend. This is why REIT yields tend to be leaps and bounds higher than the benchmark S&P 500.
If you want to generate, say, $600 in super safe annual-dividend income, all you'd have to do is invest $5,825 (split equally, three ways) into the following three ultra-high-yield REITs, which sport an average yield of 10.3%.
AGNC Investment: 15.25% yield
The first supercharged REIT that can help you generate $600 in super safe annual-dividend income from an initial investment of $5,825 (split equally, three ways) is mortgage REIT AGNC Investment (AGNC 0.27%). Though its 15.25% yield might seem too good to be true, AGNC has averaged a double-digit yield in 13 of the past 14 years. As a bonus, it also pays its dividend on a monthly basis.
Mortgage REITs are businesses that seek to borrow money at low short-term lending rates and use this capital to purchase higher-yielding, long-term assets, such as mortgage-backed securities (MBS). The goal is to maximize the spread between the yield they generate on the MBSs they own less their average borrowing rate. This spread is known as "net-interest margin."
NASDAQ: AGNC
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To be brutally honest, AGNC Investment and its peers have struggled mightily for more than a year on the heels of the fastest increase in interest rates in four decades, as well as a steep inversion of the Treasury yield curve. These actions have increased short-term borrowing costs, reduced the value of AGNC's assets, and shrunk its net-interest margin. Despite these challenges, the future looks bright for AGNC.
To begin with, history pretty conclusively shows that the Treasury yield curve spends far more time sloped up and to the right than in a state of inversion. Put another way, Treasury bonds that mature 10 or more years from now are going to carry higher yields than Treasury bills maturing in a few months. When the yield curve normalizes, it'll provide a catalyst that can expand AGNC's net-interest margin.
The Federal Reserve no longer purchasing MBSs is also a big deal. When the nation's central bank was supporting the mortgage market by purchasing MBSs, it was taking moneymaking opportunities away from mortgage REITs like AGNC. The Fed's exit represents a red-carpet opportunity for AGNC.
Perhaps most important, almost the entirety of AGNC Investment's $58 billion investment portfolio is tied up in agency securities. An "agency" asset is protected by the federal government in the event of default. This extra protection affords AGNC the ability to lever its investments and pump up its profit potential without an outsized amount of risk. This is why its double-digit yield has been sustainable
NYSE: IIPR
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Innovative Industrial Properties: 9.51% yield
A second ultra-high-yield REIT that can produce $600 in super safe annual-dividend income from a starting investment of $5,825 (split equally, three ways) is cannabis-focused REIT Innovative Industrial Properties (IIPR +5.48%), which is better known as "IIP." Since introducing its payout in 2017, IIP's quarterly distribution has grown by a jaw-dropping 1,100%.
IIP's operating model is to acquire medical marijuana cultivation and processing facilities, with the goal of leasing these assets to multistate operators (MSOs) for a period of 10 to 20 years. IIP builds inflationary rental increases into its long-term contracts, along with a 1.5% property management fee that's based on the rental rate.
The biggest concern for most REITs is rental delinquencies. Following years of no collection issues, IIP's rental collection rate dipped to 92% in January and February of this year. The good news is that IIP's management team has adapted well to these challenges. Jettisoning a couple of properties and reworking a handful of master-lease agreements lifted Innovative Industrial Properties' collection rate, including property management fees, to 97% during the June-ended quarter.
Predictability of funds from operations (FFO) is another reason IIP can consistently deliver such a robust payout to its investors. On top of a weighted-average lease term of 14.9 years, 99.9% of its rentable space is triple-net leased (also known as "NNN-leased").
In exchange for a lower monthly rental payment, triple-net leases make virtually all property costs the responsibility of the tenant. This includes utility expenses, insurance, property taxes, and maintenance. Moving these expenses to its tenants means there are no surprise costs for IIP.
Innovative Industrial Properties is also one of the few cannabis companies that's actually benefited from marijuana remaining an illicit substance at the federal level. As long as weed is illegal, MSOs will have limited access to basic financial services at banks and credit unions. IIP has resolved this cash-crunch issue for select MSOs with its sale-leaseback program.
Since IIP is generating positive cash flow and has multiple avenues to raise cash, it's acquiring properties from cash-needy MSOs and immediately leasing them back to the seller. This is a win-win for both parties, and it's landed Innovative Industrial Properties a number of long-term tenants.
Grocery stores make up a meaningful percentage of Realty Income's leased properties. Image source: Getty Images.
Realty Income: 6.15% yield
The third ultra-high-yield REIT that can help you bring home $600 in super safe annual-dividend income with a beginning investment of $5,825 (split equally, three ways) is retail REIT Realty Income (O 0.77%). Realty Income (like AGNC) pays a monthly dividend and has increased its payout for 30 years in a row, including 104 consecutive quarters. It's quite possibly the safest payout among REITs.
The biggest knock you'll find against Realty Income is that retailers are often cyclical. This is to say that retail sales slow down when U.S. economic growth slows or shifts into reverse. If the U.S. falls into a recession, there's the concern of rental delinquencies rising. Thankfully, Realty Income has a few tricks up its proverbial sleeve.
To begin with, the vast majority of Realty Income's leases isn't exposed to wild cyclical swings. The 76% of its portfolio devoted to retail is predominantly focused on non-discretionary goods and services, such as convenience stores, grocery stores, dollar stores, home improvement, and drug stores.
NYSE: O
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In other words, we're talking about products consumers are going to buy no matter how well or poorly the U.S. economy is performing. With another 15% of the company's leases outside the retail arena, around 91% of its portfolio is reasonably resilient to U.S. and global economic downturns.
Realty Income's occupancy rate is also worth marveling at. As of the end of June, 99% of its 13,118 commercial real estate property portfolio was leased. For context, that's nearly five percentage points ahead of the industry average for retail REITs since 2000, and it's about 80 basis points above the company's own average occupancy rate of 98.2% since the start of the century. Careful vetting of its tenants has led to highly predictable cash flow and a weighted-average lease term of 9.6 years.
Another reason current and prospective Realty Income investors can be excited is the company's expansion beyond the retail industry. Since December 2022, Realty Income closed a sale-leaseback agreement with Encore Boston Harbor, a luxury hotel and casino operator by Wynn Resorts, and committed $950 million to a joint venture with Blackstone Real Estate Income Trust to own a majority interest in the real estate assets of The Bellagio Las Vegas. The Bellagio is operated by MGM Resorts International. Pushing into the gaming industry is one of many ways Realty Income's experienced management team is positioning this dividend juggernaut for future growth.
