Want $10,000 in dividend income in 2022? Invest $108,000 in this trio of ultra-high yielding stocks
Time and again, the stock market demonstrates the power of patience for investors. Despite the much followed S&P500 undergoing 38 double-digit corrections since the start of 1950, each of these significant declines was eventually put in the rearview mirror by a bullish rally.
While a myriad of investment strategies have been effective in enriching long-term investors, perhaps none has a better track record than buying dividend-paying stocks.
Dividend stocks have a rich history of crushing their non-dividend paying peers
In 2013, JP Morgan Asset Management, a division of JPMorgan Chase, released a report comparing the performance of publicly traded companies that launched a dividend and increased their payouts to public companies that did not pay a dividend between 1972 and 2012. During this four-decade span, stocks paying dividends completely trampled the non-dividend payers on an annualized yield basis (9.5% vs. 1.6%).
These are precisely the results we expected. Companies that pay a regular dividend are almost always profitable, proven, and have a transparent outlook. In other words, they are consistent businesses that should grow in value over time.
The biggest challenge for dividend investors is simply balancing return and risk. Ideally, income seekers want as high a return as possible with as little risk as possible. However, data has shown that risk and reward tend to be correlated once a payout reaches high-return territory (4% and above). Since return is a function of payout relative to stock price, a struggling company with a plummeting stock price may be high yielding but nothing more than a revenue trap. .
The good news is that there are stable companies with very high dividend yields – a yield that I arbitrarily define as 7% or more – that can provide investors with inflation crushing income.
The following trio of ultra-high yield stocks have an average yield of 9.31%. In other words, you could generate $10,000 in dividend income in 2022 by investing $108,000 and dividing it equally among the following three stocks.
Annaly Capital Management: return of 10.89%
The first ultra-high-yielding dividend stock with a rich history of filling its shareholders’ portfolios is Annaly Capital Management (NYSE: NLY). Since the company was founded a quarter of a century ago, it has paid more than $20 billion in dividends and has averaged a return of around 10% over the past two decades. On this list, his yield of 10.89% is the top dog.
Annaly Capital Management is a mortgage real estate investment trust (REIT). In easy-to-understand terms, Annaly wants to borrow money at the lowest possible short-term lending rate and use that capital to buy higher-yielding, long-term assets like mortgage-backed securities (MBS). ). The average return Annaly receives from her portfolio of assets, minus her average borrowing rate, is called her net interest margin. The larger this net interest margin, the more profitable the mortgage REIT is (often).
For Annaly and her peers, nothing is more important than interest rates. Although a low interest rate environment is more favorable than a rising interest rate environment, the speed at which monetary policy changes are undertaken is more important. If the Federal Reserve takes slow, decisive action to change its monetary policy, it gives Annaly time to adjust its asset portfolio to maximize profitability. Even though rates are set to rise in 2022 as the country’s central bank turns hawkish, the Fed’s clearly stated intentions offer Annaly the path to continue to thrive.
Also, mortgage REITs have a history of outperforming during economic upturns, and that’s where we find ourselves right now. It is quite common for the yield curve to steepen when it rebounds from a recession. This implies the widening of the yield spread between short-term and long-term Treasury bonds. When this happens, Annaly’s net interest margin typically increases.
Annaly is currently trading slightly below its book value and entering its historic sweet spot, investors can be confident adding this source of income to their portfolios.
Enterprise Product Partners: 7.78% return
Another ultra high yielding dividend stock that can help investors generate a mountain of income in 2022 is Enterprise Product Partners (NYSE:EPD). Although its 7.78% yield is the lowest yield of this trio, the company is working on a 23-year streak to increase its base annual payout.
For some people, the idea of putting their money to work in a business related to the oil and gas industry isn’t acceptable – and it’s not hard to see why. In 2020, crude oil suffered from a historic decline in demand that sent the price of West Texas Intermediate (WTI) crude plummeting. Deeply indebted drilling and exploration companies have been decimated.
What sets Enterprise Products Partners apart is its role as an intermediary supplier. Midstream oil and gas companies own the pipelines responsible for transporting and the storage facilities used to hold the oil or natural gas. Enterprise Products Partners owns approximately 50,000 miles of pipeline, can store 14 billion cubic feet of natural gas, and owns 19 natural gas processing facilities.
The beauty of the company’s operating model is how its contracts are structured. While fluctuations in WTI can have a direct impact on drilling companies, Enterprise Products Partners’ contracts include price and volume commitments that allow it to transparently forecast its cash flows. This transparency has been essential for the company to reserve capital for new infrastructure projects without compromising profitability or its huge payout.
At no time during the pandemic was the company’s distribution at risk of being cut. With WTI now rebounding to multi-year highs, Enterprise Products is a good bet to continue its streak of annual base payout increases in 2022.
AGNC Investment Corp. : yield of 9.25%
The final Ultra High Yield stock to complete the trio is AGNC Investment Corp. (NASDAQ:AGNC). AGNC has averaged double-digit returns in 11 of the past 12 years, and it’s the only one of those three stocks to pay a monthly dividend.
AGNC is another mortgage REIT poised for good things in 2022 and beyond. As stated with Annaly, this industry is very sensitive to interest rates. Although the Fed’s rate hike has the potential to increase the company’s short-term borrowing costs, it is far more important that the country’s central bank not make sudden or sudden monetary policy moves. unexpected. As long as the target federal funds rate is increased by 25 basis points at a time in regular meetings, AGNC will have ample opportunity to modify its asset portfolio and maximize its profit potential.
Another thing to understand about AGNC, which also goes for Annaly, is its focus on agency titles. An agency asset is guaranteed by the federal government in the event of default. As you can imagine, this added protection reduces the return AGNC (and Annaly) can expect to receive on the agency MBS it purchases, relative to the non-agency assets. On the other hand, this protection allows AGNC to safely leverage its portfolio to increase its earning potential.
With the Fed making its policy intentions clear and the mortgage REIT sector offering highly predictable cash flows, it is common for mortgage REITs like AGNC to trade close to their book values. But at the moment, AGNC can be recovered at 11% below book value. This is an incredible boon for a company entering what has always been a period of growth for it and its peers.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.