Though there a lot ways to make money on Wall Street, buying and holding dividend stocks has historically been one of the top strategies.
Last year, a study released by the Hartford Funds, in cooperation with Ned Davis Research, found that dividend-paying companies delivered an annualized return of 9.18% between 1973 and 2022. That compared to an annualized return of 3.95% for non-paying companies over the same five-decade stretch. While not all dividend stocks are created equally, the takeaway is that profitable, time-tested income stocks have a knack for making patient investors richer.
Entering 2024, I held stakes in 45 stocks -- 19 of which are currently paying a dividend. Though I'm still young enough to favor the upside potential of innovative growth stocks, I've grown fonder of dividend stocks in my 40s.
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In particular, I've added a handful of high-octane dividend stocks to my portfolio. Despite studies showing that risk and yield tend to go hand in hand when yields top 4%, some truly phenomenal income stocks can be found with jaw-dropping yields.
Say hello to the three ultra-high-yield dividend stocks I'm counting on to make me richer, which currently sport an average yield of 10.55%!
Annaly Capital Management: 13.47% yield
The first supercharged dividend stock I'm gladly accepting outsized quarterly payments from is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 1.02%). Annaly is currently yielding 13.5% and has returned $25 billion in aggregate dividends to its shareholders since becoming a public company in October 1997.
There's probably not an industry that's been more universally disliked for years by Wall Street than mortgage REITs. The industry is highly interest rate sensitive, and the Federal Reserve's aggressive rate-hiking cycle hasn't been good news.
Mortgage REITs like Annaly want to borrow money at low short-term lending rates and use this capital to buy higher-yielding long-term assets, such as mortgage-backed securities (MBS). An aggregate 525-basis-point rise in the federal funds rate since March 2022, coupled with an inverted yield curve, has meaningfully increased short-term borrowing costs and narrowed the net interest margin of mortgage REITs.
Although it's tough to find a silver lining for an industry that's been bruised and battered, I believe the light at the end of the proverbial tunnel is a lot closer for mortgage REITs than investors realize. A number of factors are now working in the industry's favor.
For example, the nation's central bank is expected to cut interest rates three times in 2024. Mortgage REITs historically outperform during rate-easing cycles, which helps to lower short-term borrowing costs.
To add to the above, the Fed's quantitative easing measures ended, and it's no longer purchasing MBSs in an attempt to support the housing market. Not having the nation's central bank as a buyer of MBSs opens the door for Annaly to land more lucrative MBSs for its own asset portfolio.
Another reason I'm optimistic about Annaly Capital Management is the expected normalization of the Treasury yield curve in the coming quarters. Extended yield-curve inversions are rare, and a normalization of the yield curve should provide a healthy lift to Annaly's net interest margin.
Lastly, Annaly Capital Management almost exclusively invests in agency assets. An "agency" security is backed by the federal government in the event of default. While this added protection reduces the yield Annaly receives on the MBSs it purchases, it also allows the company to utilize leverage to maximize its profit potential.
Innovative Industrial Properties: 7.73% yield
A second ultra-high-yield dividend stock I'm counting on to help growth my wealth over the long run is cannabis REIT Innovative Industrial Properties (IIPR -0.17%), which is also known as IIP. Since introducing its quarterly dividend in mid-2017, IIP's payout has grown by an eye-popping 1,113% -- $0.15/quarter to $1.82/quarter.
If mortgage REITs are Wall Street's most-hated industry, marijuana stocks aren't too far behind. While there was plenty of buzz surrounding pot stocks in late 2020 and early 2021, it quickly faded. The Democrat-led Congress of 2021-2022 yielded no meaningful cannabis reforms on Capitol Hill, which soured investors' desire to own marijuana stocks.
However, IIP is a different beast altogether. As a REIT, its purpose is to purchase medical marijuana cultivation and processing facilities and lease these properties out for long periods. This means the day-to-day operating activities of the cannabis industry aren't nearly as important as having its tenants pay their rent on time.
At this time last year, IIP was contending with its first major challenge as a public company: delinquencies. In January 2023, IIP reported receiving only 92% of its contractual rent on time. Since then, the company's management team has reworked some master-lease agreements and divested a few properties. As of the September-ended quarter, the company collected 97% of expected rent, including management fees. It would appear that management has successfully navigated this headwind.
One of my favorite aspects of Innovative Industrial Properties' operating model is that it almost exclusively involves triple net leases. A triple net lease requires the tenant to cover all applicable property costs, including utilities, insurance, property tax, and maintenance. The advantage of the triple net lease approach is that it virtually eliminates unpredictable expenses from the equation for IIP.
I'd be remiss if I didn't also mention that marijuana remaining illicit at the federal level is actually a good thing for Innovative Industrial Properties. Cannabis being illicit means pot companies have limited access to basic financial solutions, including loans and lines of credit.
IIP resolves this issue through its sale-leaseback program. It purchases properties for cash and immediately leases them back to the seller. It's a win-win for both parties, with the seller receiving much-needed cash and IIP securing a long-term tenant.
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PennantPark Floating Rate Capital: 10.44% yield
The third ultra-high-yield dividend stock I'm counting on to make me richer is little-known business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.61%). PennantPark pays its dividend on a monthly basis and has averaged a high-single-digit yield over the trailing decade.
A BDC invests in the debt and/or equity (common or preferred stock) of middle-market companies. By "middle market," I'm generally referring to micro- and small-cap businesses. Despite holding almost $161 million in common and preferred stock at the end of September, PennantPark is predominantly a debt-focused BDC, as evidenced by the roughly $906 million in debt securities in its portfolio.
There are a couple of key advantages to PennantPark's debt-driven investment approach. Chief among them is the yield it's able to generate from borrowers. Since the company is primarily seeking out private, unproven businesses whose debt is rated below investment grade, it's had no trouble securing a yield that trounces the prevailing rate of inflation. PennantPark's weighted average yield on debt investments was a scorching-hot 12.6%, as of Sept. 30, 2023.
More importantly, the entirety of PennantPark's debt investment portfolio sports variable rates. Changes in Federal Reserve monetary policy can increase or decrease the amount of interest income the company generates. The noted 525-basis-point increase in the federal funds rate has lifted PennantPark's weighted average yield on debt investments from 7.4% to 12.6% over the trailing two years, ended in September.
Even though PennantPark has chosen to invest in generally unproven companies, the nonaccrual (i.e., delinquency) rate for its debt investments is quite low. Less than 1% of the company's cost basis was on nonaccrual at the end of September. This is an especially impressive accomplishment, given the rapid rise in interest rates we've witnessed over the past two years.
The final catalyst that sold me on PennantPark Floating Rate Capital as an income-driven investment is its capital preservation strategy. All but $100,000 of its $906.3 million debt investment portfolio is in first-lien senior secured loans. First-lien secured debt holders are first in line for repayment if a borrower seeks bankruptcy protection.
Furthermore, PennantPark's aggregate of $1.07 billion in invested assets is spread across 131 companies. This works out to an average investment size of $8.1 million, and all but ensures that no single investment is critical to its success or failure.
