The stock market is great in that there are many ways for investors to build wealth on Wall Street. But if there’s one almost constant among the world’s top-performing fund managers, it’s that they flock to dividend-paying stocks.
Companies that pay a dividend are generally profitable and have proven operating models. They also clearly have the upper hand when it comes to long-term performance. Compared to stocks that did not pay dividends over a 40-year period (1972-2012), dividend-paying stocks provided a higher average annual return (9.5% vs. 1.6%), according to a report by JP Morgan Asset Management.
In an ideal world, income seekers want the highest possible return with the least amount of risk. However, data shows that the higher a dividend yield, the higher the risk often and the lower the reward.
Fortunately, not all ultra-high dividend stocks are bad news. The following quartet of super high yielding stocks, which are yielding a minimum of 7.5%, can be comfortably bought hand in hand by income investors right now.
Annaly Capital Management: return of 9.9%
The Mortgage Real Estate Investment Trust (REIT) is arguably the safest real estate investment company among very high yielding dividend stocks. Annaly Capital Management (NYSE: NLY). Annaly currently pays a return of almost 10%, has averaged around 10% for more than two decades, and has collectively paid more than $ 20 billion in dividends since its IPO.
Put simply, mortgage REITs borrow money at lower short-term rates and use that capital to buy assets (mortgage-backed securities) with higher long-term returns. This difference between the higher long-term yield and the short-term borrowing rate is known as the net interest margin. Annaly wants her net interest margin to be as large as possible – and investors too, since Annaly pays the majority of her operating income in the form of dividends to her shareholders.
The worst possible scenarios for mortgage REITs are when the yield curve flattens or if the Federal Reserve quickly adjusts its target federal funds rate. Conversely, a steepening rate curve and clearly defined monetary policy tend to be the best case scenario for Annaly. Right now, we are in the latter case, with the US economy recovering and the yield curve steepening.
Equally important, Annaly’s asset portfolio leans heavily toward agency stocks – $ 92.6 billion out of $ 100.4 billion in total assets. The agency’s assets are guaranteed by the federal government in the event of default. This protection allows Annaly to use leverage wisely to her advantage to increase her income potential.
Enterprise Product Partners: 7.5% return
I get it – some people are rightly concerned about putting their money to work in the oil and gas industry after what happened during the coronavirus pandemic. This event resulted in a historic drop in demand for crude oil and a very brief period in which crude oil futures have traded at negative prices. But there is one high-yielding oil stock that has beaten the fear: Enterprise Product Partners (NYSE: EPD).
How easily does a stock of oil and gas withstand such a drop in demand? The answer has to do with the direction of Enterprise Products Partners. While upstream drillers have been hit by weak demand and falling prices, middleman firms like Enterprise, which transport and store oil, natural gas and natural gas liquids (NGLs) ), were not seriously affected. Enterprise has more than 50,000 miles of pipelines and 14 billion cubic feet of natural gas storage capacity.
The nice thing about intermediary businesses is that their income is often based on pre-defined contracts or fees (for example, outright purchase contracts). In other words, Enterprise generates highly predictable cash flows from year to year, allowing it to allocate capital expenditures without fear of overspending and jeopardizing its dividend.
Despite all the struggles in the industry last year, Enterprise Products Partners’ distribution coverage ratio – distributable cash flow divided by distributions payable to shareholders – has never fallen below 1.6. , and it is currently 1.8. With a 22-year streak of increasing its annual base payout, Enterprise is a very safe, ultra-high dividend stock that you can buy right now.
Mobile telesystems: 8.7% efficiency
For you, international stock market investors, Russian telecoms giant Mobile telesystems (NYSE: MBT) is another smart way to build wealth and collect a cargo of income. If you were to reinvest your dividends at that 8.7% yield, MTS, as the company is also known, would double your initial investment in just over eight years.
The main activity of the company is the provision of wireless services throughout Russia. Although the Russian wireless market is heavily saturated, MTS has a huge catalyst in its back pocket: the rollout of 5G. Upgrading its infrastructure to 5G in major Russian cities, along with expanding 4G coverage to suburbs across the country, is expected to lead to a multi-year tech upgrade cycle that spikes data consumption . Since wireless service providers generate their juiciest margins from data, spending a lot on 4G and 5G is an obvious move by MTS to increase its organic growth rate.
Mobile TeleSystems further seeks to increase its growth rate by becoming a kind of conglomerate. It now operates MTS Bank, offers pay TV services and even offers cloud solutions. The first quarter saw sales of cloud and digital solutions jump 28%, with MTS Bank’s personal loan portfolio increasing 35%.
For now, these ancillary businesses are little potatoes next to wireless. However, the ability to consolidate two or more of its departments should lead to an increase in margin and increase its potential for organic growth.
AGNC Investment Corp. : 8.5% yield
Annaly Capital Management has been successfully generating income for its shareholders for nearly a quarter of a century. However, it is not the only mortgage REIT that can line the pockets of investors right now. AGNC Investment Company (NASDAQ: AGNC) and its 8.7% yield can also be bought hand in hand. For the past 13 years or so, AGNC has been a publicly traded company, it has also averaged double-digit annual returns.
Like Annaly, we are ideal for AGNC. Even though long-term bond yields have fallen slightly over the past month, the yield curve has steepened considerably from where it started the year. This steepening should allow AGNC to earn slightly higher returns on the longer-term mortgage-backed securities assets it purchases. After reporting a net interest spread of 1.30% in the first quarter of 2020, AGNC’s net interest margin widened by 70 basis points to 2% in the last quarter.
Likewise, there is security in these numbers. AGNC has chosen to focus almost exclusively on agency assets. It ended March with $ 90.3 billion in total assets, including $ 63.6 billion in agency mortgage-backed securities, and just $ 1.9 billion in risk transfers from credit and non-agency assets. The fact of devoting only 2% of its portfolio to these riskier assets ensures a stable net income.
Finally, AGNC pays its dividend on a monthly basis ($ 0.12 per month). If you’re impatient and prefer instant gratification, AGNC is the way to go.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.