Want $ 5,000 in annual dividend income? Invest $ 57,000 in these super high yielding stocks
Although Wall Street offers no guarantees, one almost constant has been the outperformance of dividend-paying stocks over the long term.
In 2013, JP Morgan Asset Management, a division of JPMorgan Chase, published a report comparing the performance of public companies that initiated and increased their dividends between 1972 and 2012 with that of publicly traded companies that did not offer payment. The results showed a difference day and night. Profitable and proven dividend paying stocks have averaged 9.5% annual returns over four decades. Meanwhile, non-dividend-paying companies averaged a low annualized return of 1.6% over the same period.
However, the irony of investing in dividends is that often the higher the return, the lower the realized return. Since return is a function of payout versus share price, a company with a struggling or utterly failing business model can show an ultra-high return, but be a terrible investment.
Fortunately, this is not the case with all very high yielding stocks. Investors wishing to generate significant dividend income can do it with companies whose return exceeds 7%. If you want to generate $ 5,000 in annual dividend income, investing $ 57,000, split evenly among the following four very high yielding stocks that have an average return of almost 8.8%, would do the trick.
Annaly Capital Management: 10.4% return
Perhaps one of the safest ways to maximize your dividend income is to put money to work in a Mortgage Real Estate Investment Trust (REIT). Annaly Capital management (NYSE: NLY). Annaly has averaged a return of around 10% over the past two decades and has distributed over $ 20 billion in dividends since its inception in 1997.
Mortgage REITs like Annaly borrow money at low short-term lending rates and use that capital to buy higher-yielding long-term assets, such as mortgage-backed securities (MBS). The goal is to maximize the difference between the average yield received from the MBS minus the borrowing rate. This difference is known as the net interest margin.
What’s interesting about Mortgage REITs is that their payback cycle tends to be predictable. They perform poorly when the interest rate curve flattens and / or the Federal Reserve makes rapid or unexpected changes in monetary policy.
On the other hand, they work well when the yield curve steepens and / or the country’s central bank slows down monetary policy changes. Historically, an economic recovery from a recession leads to the latter scenario, which is great news for Annaly.
With a yield of 10.4%, Annaly is a good bet to put inflation in its place.
AGNC Investment Corp. : yield of 8.9%
Did I mention that Mortgage REITs are a great place for investors to maximize their dividend income? AGNC Investment Corp. (NASDAQ: AGNC) pays a solid monthly dividend that, over the course of a year, equates to a yield of 8.9%, as of October 11. In addition, AGNC has averaged an annual return of 10% or more over 11 of the past 12 years.
The variables that dictate the push-pull of profitability for Annaly are effectively the same for AGNC Investment. The early stages of the economic recovery in the United States should encourage the country’s central bank to walk on eggshells with its monetary policy until 2022, if not 2023. The Fed providing a transparent outlook allows AGNC, Annaly and their peers to ” adjust their asset portfolios to maximize their net interest margin.
The other key for AGNC (and Annaly, for that matter) is that it invests almost exclusively in agency securities. The agency’s assets are guaranteed by the federal government in the event of default.
At the end of the June quarter, $ 85.5 billion of its $ 87.5 billion in securities held were agency-backed. While this extra protection decreases the return it receives from the MBS it purchases, it also allows the company to use leverage to inflate its profits.
Sabra Health Care REIT: 8.1% return
Another dividend-paying stock capable of generating bountiful returns is Sabra Healthcare REIT (NASDAQ: SBRA). Even after cutting its quarterly payment last year by a third to $ 0.30, the operator, which rents nearly 450 nursing homes and senior housing, still reports 8.1%, with funds more than sufficient to maintain its distribution. .
As you can rightly imagine, the pandemic affected skilled nursing homes and retirement homes last year. This unprecedented uncertainty was the catalyst that led Sabra Health Care to cut its payments by a third.
However, things are improving rapidly for Sabra Health Care and its peers as coronavirus vaccination rates rise. The company has collected 99.8% of forecast rents since the start of the pandemic, through August 2021, with rent deferrals totaling just $ 1.7 million.
Additionally, Sabra Health Care appears to be sitting on a gold mine as baby boomers age. Even after going through the pandemic, the average occupancy rate of the company in its various facilities varies from 72% to 82% and is only expected to increase over time.
Sabra is currently trading below its book value, this looks like a real high yielding bargain in the healthcare REIT arena.
Enterprise Product Partners: 7.7% return
A fourth and final super high yield dividend stock that can offer great benefits to income seekers is the mid-level energy company. Enterprise Product Partners (NYSE: EPD). Although its return is the lowest on this list at 7.7%, Enterprise Products Partners has increased its annual base payout for 22 consecutive years.
Considering what happened last year, the idea of relying on oil stocks for dividend income might not seem so acceptable. When demand for crude suffered an historic decline during the pandemic, the financial outlook and dividend payouts for a number of oil stocks suffered.
But this was not the case for Enterprise Products Partners, which is mostly immune to wild swings in energy prices, due to its role in managing the transportation and storage of fossil fuels. The company operates approximately 50,000 miles of pipelines and can store 14 billion cubic feet of natural gas.
Enterprise Products Partners also benefits from the structure of its contracts with drillers. Knowing well in advance how much oil, natural gas, and natural gas liquids it will transport, process or store allows management to easily invest capital for organic infrastructure expansion without compromising its payment or profitability.
At no point during the pandemic did Enterprise Products Partners’ dividend threaten to be reduced, making this income share a surefire opportunity for investors.
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 heterogeneous! 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.