Making money in the stock market is easy... if you own dividend stocks.
According to a report published by J.P. Morgan Asset Management in 2013, publicly traded companies that initiated and grew their payouts between 1972 and 2012 averaged an annual return of 9.5%. As for their non-dividend-paying peers, average annual gains were a paltry 1.6% over the same 40-year period. Because dividend stocks are almost always profitable and time-tested, they're logical candidates to make investors rich.
Ideally, income seekers want the highest yield possible with the least amount of risk. However, data shows that once yields cross about 4%, yield and risk are tightly correlated. This is to say that ultra-high-yield companies usually prove to be more trouble than they're worth. Since yield is simply a function of payout relative to share price, a failing or struggling operating model can trap income seekers with a high dividend yield.
But there's good news. The following five ultra-high-yield dividend stocks -- which I'm arbitrarily defining as a yield of 7%+ -- have the potential to make their shareholders rich.
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Annaly Capital Management: 10.3% yield
Arguably one of the safest ways to build wealth over the long run is to buy and hold the premier name among mortgage real estate investment trusts (REIT), Annaly Capital Management (NYSE:NLY). Annaly has paid out over $20 billion in dividends since its inception over two decades ago, and it's averaged a roughly 10% yield over the past 20 years.
In simple terms, Annaly seeks to borrow money at low short-term lending rates and uses that capital to purchase assets (mortgage-backed securities) with a higher long-term yield. The difference between this higher long-term yield and lower short-term borrowing rate is known as the net interest margin. The wider this margin, the more profit Annaly has the potential to make. Historically, mortgage REITs see their net interest margins widen noticeably during the early years of an economic recovery as the yield curve steepens. This means we're right in the sweet spot where mortgage REITs outperform.
The other key selling point for Annaly is that it's loaded its portfolio with agency securities ($92.6 billion of $100.4 billion in total assets). This is a way of saying that a vast majority of its assets are backed by the federal government in the event of a default. This added protection is what allows Annaly to wisely use leverage to its advantage in order to boost its profitability.
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Enterprise Products Partners: 7.4% yield
Put plainly, the idea of buying into an oil and gas stock following the shellacking the industry took during the pandemic is enough to make some long-term investors squirm. But ultra-high-yielding dividend midstream company Enterprise Products Partners (NYSE:EPD) was virtually unfazed by the pandemic -- as evidenced by its distribution coverage ratio not dropping below 1.6 -- and is riding a 22-year streak of increasing its base annual payout.
The biggest advantage Enterprise Products Partners holds for investors is its place within the energy complex. Midstream companies that provide the transmission and storage capacity for oil, natural gas, and natural gas liquids typically offer predictable cash flow no matter how well or poorly the economy is performing. Leaning on transparent fee-based contracts allows Enterprise to undertake projects without inadvertently harming its cash flow or profitability. The company currently has over 50,000 miles of pipeline in the U.S., along with 14 billion cubic feet of natural gas storage capacity.
The other factor fueling healthy distributions for Enterprise Products Partners is its willingness to spend on capital expenditures and acquisitions. Even though we're liable to witness energy companies steadily shift to greener solutions over time, fossil fuels will remain a key source of energy production for decades to come.
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Mobile TeleSystems: 11.1% yield
The high-water mark on this list, in terms of yield, is Russian telecom giant Mobile TeleSystems (NYSE:MBT). Keep in mind that MTS, as the company is known, varies its dividend based on its operating performance. Nevertheless, it's been consistently delivering a payout north of 7% annually.
Mobile TeleSystems' bread and butter will continue to be its wireless operations. Even though Russia is a highly saturated wireless market, infrastructure upgrades are going to be key in driving organic growth higher. The introduction of 5G download speeds in Russia's major cities, as well as the ongoing rollout of 4G in Russian suburbs, should create a sustainable technology upgrade cycle that leads to increased data consumption -- and data is where wireless providers make their juiciest margins.
Beyond just the cash flow predictability associated with its wireless operations, MTS also has a number of rapidly growing new verticals, including MTS Bank, paid TV, and cloud services, to name a few. Over just the past year, Active paying TV users rose 54% to 7.1 million, with over-the-top customers nearly tripling to 2.9 million. Meanwhile, cloud services revenue rose 28% from the year-ago quarter. Though these segments aren't contributing a lot of revenue now, they'll likely play an important role in the company's long-term growth prospects.
Image source: Getty Images.
AGNC Investment Corp.: 8.8% yield
Have I mentioned that the mortgage REIT industry is hitting its stride? In addition to putting your money to work in industry leader Annaly, its veritable sidekick, AGNC Investment Corp. (NASDAQ:AGNC), has a really good chance to outperform and make its shareholders rich. Since going public roughly 13 years ago, AGNC's yield pretty much hasn't dipped below 8%.
Just like Annaly, AGNC has aligned its portfolio to take advantage of agency mortgage-backed securities. Excluding to-be-announced securities, the company held $62.1 billion of agency-backed residential mortgage-backed securities (RMBS) in the first quarter. That compares to less than $500 million in non-agency RMBS and $1.1 billion in credit-risk transfer securities. Without getting overly technical, only around 3% of total assets are in potentially risky long-term assets, which is what's led to a steady stream of dividend income for shareholders.
And there's a bonus that awaits AGNC's investors. Whereas the other companies on this list pay their dividends quarterly or twice a year, AGNC doles out its dividend of $0.12 on a monthly basis. If the U.S. economy continues to gain steam and the yield curve steepens, this payout and the company's book value have room to expand.
Image source: Getty Images.
Altria Group: 7.3% yield
Last but not least, consider putting brand-name tobacco stock Altria Group (NYSE:MO) to work in your portfolio. Since 1972, Altria share price appreciation plus dividend have returned greater than 2,600,000% for its shareholders, according to data from YCharts.
With its focus on the U.S. market, the bulk of Altria's revenue is derived from the sale of premium cigarette brand Marlboro. Although cigarette shipment volume has been on a fairly steady decline over the years as the negative health impacts of smoking have coerced some users to quit, the addictive nature of nicotine has also allowed Altria to boost the price for its premium products. These price hikes usually make up for the decline in cigarette shipments.
Altria is also focused on life beyond tobacco cigarettes. It's offering a line of smokeless tobacco products in select cities, and it owns a 45% stake in Canadian marijuana stock Cronos Group. If the U.S. were to ever legalize cannabis at the federal level, Altria would almost certainly become a favorite in the U.S. to develop a leading cannabis vape product with Cronos.
Even though it's not the growth stock it once was, Altria's heavy dose of share buybacks and exceptional pricing power make it a dividend stock with all the potential to make its shareholders rich.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.
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