The good thing about Wall Street is that there is no single investment strategy. Whether you prefer growth, value or income stocks, there is a path to building wealth over time.
Again, there’s no denying the outperformance that dividend stocks have demonstrated over the long term.
In 2013, JP Morgan Asset Management, a division of the money center giant JPMorgan Chase, released a report that looked at 40 years of data and compared the performance of publicly traded companies that initiated and increased their payouts to those that did not pay dividends. The results were night and day. Companies that initiated and increased their payouts averaged a 9.5% annualized return between 1972 and 2012. By comparison, non-dividend stocks made annualized gains of just 1.6% over the same period.
These results should not surprise you. Companies that pay a dividend tend to be profitable on a recurring basis and they generally have proven operating models. In other words, these are companies that have seen their fair share of economic contractions and are coming out stronger on the other side.
But even though dividend stocks tend to outperform, they have a catch. Once they have reached high-return territory (a return of 4% or more), risk and reward are often correlated. Since return is a function of payout relative to stock price, a struggling company with a plummeting stock price could lure unsuspecting investors into dire straits.
The good news is that quality high yield and ultra high yield stocks To do to exist. “Ultra-high-yield” being an arbitrary term I use to describe income stocks with yields of 7% or more. If you’re looking for above-average dividend income that will put high inflation in its place, a trio of dividend-paying stocks can do just that.
With an average yield of 9.25%, this trio of ultra-high yield stocks can generate an annual income of $2,500 from an initial investment of just $27,100 (split evenly across three).
AGNC Investment Corp. : yield of 9.81%
The first ultra-high yield equity investor that investors can trust to generate mountains of income is the Mortgage Real Estate Investment Trust (REIT). AGNC Investment Corp. (NASDAQ:AGNC). AGNC was returning close to 10% as of Feb. 1, and has averaged double-digit returns in 12 of the past 13 years.
While buying MBS REITs can be a bit complex at times, AGNC’s operating model is incredibly simple and transparent. Companies like AGNC are looking to borrow money at lower short-term lending rates and use that capital to buy mortgage-backed securities (MBS) with higher long-term yields. The average return generated by these MBS minus the average borrowing rate equals the net interest margin (NIM). Generally, the larger the NIM, the more profitable the mortgage REIT.
As you can imagine, a business dependent on MBS and borrowing rates generally favors a low interest rate environment. So the Federal Reserve’s new hawkish stance has some people worried about mortgage REITs. However, the important thing to note is that the country’s central bank is slowing down its monetary policy moves and clearly outlining its plan. By doing so, companies like AGNC have time to adjust their portfolios to maximize profits. In other words, while the prospect of higher interest rates has a temporarily negative impact on AGNC’s book value, it will actually be positive as MBS yields are expected to rise over time.
In addition, AGNC Investment buys almost exclusively agency assets. An “agency” title is guaranteed by the federal government in the event of an asset default. While this added protection weighs down the return AGNC earns when buying an agency asset, it also allows the company to deploy leverage to increase its profit potential.
With AGNC trading at 7% off book value and analyzing a hearty dividend of $0.12/share each month, it’s the perfect way for income seekers to generate some serious income.
Sabra Health Care REIT: yield of 9.01%
A second ultra-high yielding stock that can line investors’ pockets with dividend income is Sabra Healthcare REIT (NASDAQ: SBRA). Sabra’s yield was just over 9% at the close of trading on Feb. 1.
At the end of September, Sabra operated 421 real estate properties with a primary focus on skilled nursing facilities and senior residences. As you can probably guess, Sabra Health Care has been hammered by the coronavirus pandemic. With seniors being among the most susceptible groups to COVID-19, occupancy at many of its skilled nursing and senior housing facilities declined significantly in 2020 or early 2021.
However, vaccination rates are steadily increasing for seniors and staff in these facilities. Excluding the company’s unaccounted-for (Avamere) account, the average occupancy rate of Sabra’s other seven top skilled nurse operators jumped more than 700 basis points since December 2020. Similarly, the company recorded an improvement of 465 basis points among seniors. average housing occupancy rate since February 2021 low.
If concerns about Avamere, which leases 27 facilities in Sabra, are palpable, it should be noted that 99.7% of projected rents were collected between the start of the COVID-19 pandemic and the end of October 2021. With rates recovery, Avamere is unlikely to be a long-term problem for Sabra Health Care.
Additionally, the company remained aggressive on the investment front. In the first nine months of 2021, Sabra put nearly $397 million to work through investments, with a weighted average cash return of 7.55%. These substantial returns should easily fuel this company’s 9% payout.
Antero Midstream: yield of 8.94%
A third ultra-high yielding stock that could help investors generate inflation-beating income in 2022 is Antero Midstream (NYSE:AM). Even with a dividend cut in 2021 (I’ll get to that cut in a moment), Antero Midstream is handing out a nearly 9% yield.
For some people, the idea of putting their money to work in oil stocks will be unappetizing. The wounds are still fresh from the historic drop in demand that upstream drilling and exploration companies suffered during the height of the coronavirus pandemic.
But Antero Midstream is a whole different beast. While the parent company Antero Resources (NYSE:AR) handles drilling and exploration, Antero Midstream operates 468 miles of transmission pipeline and 3.2 billion cubic feet of natural gas compression capacity. While upstream drillers fluctuate with the price of crude, midstream suppliers benefit from the predictable cash flow that comes with fixed-fee contracts.
As for Antero’s quarterly distribution which was reduced by 27% last year, there is a very good reason behind that. Antero Resources will increase its natural gas drilling activity on the Antero Midstream domain. In response, Antero Midstream will divert some of its previously dedicated distribution capital to new infrastructure projects (i.e. pipelines, storage and processing). These new projects are expected to add $400 million in additional free cash flow by mid-decade.
With natural gas prices soaring, the stage is set for the parent company and mid-tier supplier to thrive for years to come.
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.