Want $ 10,000 in annual dividend income? Invest $ 114,000 in this trio of super high yielding stocks
Since the end of the Great Recession in 2009, growth stocks have rightly been talked about on Wall Street. Historically low lending rates have allowed fast growing businesses to borrow at cheap rates in order to hire, innovate and acquire other businesses.
But frankly, dividend-paying stocks have been the place for the long haul.
A 2013 report from JP Morgan Asset Management showed that companies initiating and increasing their payments between 1972 and 2012 generated an average annual return of 9.5%. In comparison, companies that did not offer payment only earned an annual average of 1.6% over the same period.
While it’s clear that successful, proven dividend-paying companies have generated superior returns over the long term, the question remains: which dividend-paying stocks to buy? Ideally, income seekers want the highest possible return with the least amount of risk. However, once you hit the high return mark (a payout of 4% or more) risk and reward tend to be correlated. This means that high-yielding stocks can often be more of a problem than they are worth.
But that doesn’t mean all high-yielding dividend stocks are banned. There is a trio of very high yielding stocks (what I would arbitrarily define as a yield of 7% or more) that investors can buy right now, which would result in significant income potential. If you were to invest $ 114,000 and divide it equally among those three stocks, you would be prepared to receive $ 10,000 in annual dividend income, which is an average return of 8.79%, based on the closing prices of the September 28.
Annaly Capital Management: 9.99% return
The super high yield stock I have the most confidence in will offer conservative, long-term, income-seeking investors the Mortgage Real Estate Investment Trust (REIT) Annaly Capital management (NYSE: NLY). Annaly actually brings in 10% and has averaged a payout of around 10% over the past two decades. In other words, it’s not flash-in-the-pan high performance. Since its inception in 1997, Annaly’s payout has consistently been several times higher than the benchmark. S&P 500.
The operating model of mortgage REIT is fairly straightforward. Companies like Annaly are looking to borrow money at lower short-term lending rates and use their capital to buy higher-yielding long-term assets, such as residential mortgage-backed securities ( RMBS). The goal is to widen the company’s net interest margin as much as possible – the difference in the average return received from RMBS minus the average borrowing rate – as much as possible. Like I said, this is a pretty straightforward business model.
What really matters to Annaly Capital Management are interest rates, and in this regard, everything seems to be working in its favor. Annaly typically performs poorly when the yield curve flattens (i.e. the difference between long-term and short-term Treasury yields decreases) and / or the Federal Reserve makes big changes. in its federal funds rate and monetary policy.
On the flip side, when the yield curve steepens and the country’s central bank tricks its money on monetary policy changes, Annaly does well. During the first years of an economic recovery, we are almost always in this favorable scenario.
AGNC Investment Corp. 8.93% yield
Did I mention how powerful mortgage REITs can be for income investor portfolios? AGNC Investment Corp. (NASDAQ: AGNC) currently distributes a return of almost 9% and has averaged a double-digit return over 11 of the past 12 years. Perhaps best of all, AGNC analyzes a monthly payment of $ 0.12 per share. If you’re the impatient type, a monthly payment from AGNC Investment might be the way to go.
All of the variables described above with Annaly are applicable to AGNC. A steepening of the yield curve during an economic recovery in the United States should halt the rise in shorter-term lending rates and allow the company to acquire slightly higher yielding RMBS in the market. over time. Unsurprisingly, AGNC’s average net interest spread, excluding what the company calls the amortization of ‘catch-up’ premiums, jumped to 2.09% in the quarter ended in June, against 1.68% a year ago.
Another reason AGNC has such a strong dividend is the choice of its assets. AGNC and Annaly buy almost exclusively agency RMBS. An agency title is guaranteed by the federal government in the event of default on the underlying asset. While this additional protection decreases the return AGNC can expect to receive on the agency RMBS it purchases, it also allows the company to use leverage to its advantage. Knowing that the lion’s share of its assets are protected against default, AGNC can borrow capital to increase profits in what should be the sweet spot of its growth cycle.
Altria Group: yield 7.46%
The third very high yielding stock that can help investors earn $ 10,000 per year on a $ 114,000 investment is the tobacco stock. Altria Group (NYSE: MO). Altria may not be a household name, but its Marlboro cigarette brand controls about half of all premium cigarette market share in the United States.
It is undeniable that the growth in tobacco sales is not what it used to be. With the dangers of long-term tobacco consumption known, rates of adult cigarette smoking have dropped sharply for five decades. Despite this trend, Altria is still doing quite well. The addictive nature of nicotine has given the company exceptional pricing power for its Marlboro brand. Ideally, we would like to see the volume growth of Altria. However, the inelasticity of consumer prices vis-à-vis tobacco products has led to modest growth for the company.
But don’t think that Altria is just raising the price of traditional tobacco products. The company is constantly on the lookout for new ways to market next-generation smoke-free products or to enter new revenue channels. For example, Altria invested $ 1.8 billion in Canadian marijuana stocks Cronos Group in March 2019 to obtain a 45% stake in the company. Altria is expected to assist Cronos in the development of cannabis-derived products, such as vapers.
As management aims to return a significant portion of the company’s profits to investors through dividends and share buybacks, Altria remains a very favorable action for shareholders.
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.