Want $10,000 in annual dividend income? Invest $97,200 In These Ultra High Yielding Stocks
OWhile there are many ways to build wealth on Wall Street, growing your money in dividend-paying stocks is one of the most effective.
In 2013, JP Morgan Asset Management, a division of money-center bank JPMorgan Chase, compared the performance of dividend-paying companies to that of non-dividend-paying stocks over a period of four decades (1972-2012). The results showed that dividend-paying stocks absolutely crushed their non-dividend peers on a 40-year annual return basis: 9.5% vs. 1.6%.
Since dividend companies are generally profitable and time-tested and have relatively transparent long-term prospects, their stocks are generally smart places for investors to put their money to work to build wealth over time. .
But it’s important to understand that no two dividend stocks are alike. In an ideal world, income investors would be able to earn the highest possible return with the lowest risk. Unfortunately, studies have shown that realized return and risk tend to be correlated once you reach high-return territory (4% and above).
For example, yield is simply a function of a company’s payout relative to its stock price. If a company is in trouble and its stock price has been cut in half, the company’s return will double, assuming the payout remains the same. In a number of cases, high-yield and ultra-high-yield dividend stocks (companies that I arbitrarily define as having yields of 7% or more) turn out to be more problematic than their dividends are worth.
Yet, of the dozens of ultra-high yielding stocks investors can buy, there are three, giving an average (yes, a Medium!) of 10.29%, which stand out as trustworthy. This means that if you want $10,000 in annual dividend income, you don’t even have to invest $100,000 (divided equally) in this trio. An initial investment of $97,200, at the close of business on February 8, would yield just over $10,000 in dividend income over the next 12 months.
Annaly Capital Management: return of 11.61%
The first ultra-high yielding dividend stock you can hand buy if you want a mountain of annual dividend income is Annaly Capital Management (NYSE: NLY). Annaly has paid more than $20 billion in dividends since its inception in 1997, with the company earning an average annual return of around 10% over the past 20 years. In other words, a very high return has become the expectation of the company’s shareholders.
Annaly Capital Management is a mortgage real estate investment trust (REIT). In simple terms, this means the company is looking to borrow capital at low short-term rates and use that money to buy higher-yielding long-term assets, such as mortgage-backed securities (MBS). ). The greater the spread between the yield received from MBS minus the average borrowing rate (this “spread” is known as the net interest margin), the more profitable the mortgage REIT is.
Although Wall Street has avoided mortgage REITs for what feels like a decade and more, the industry has entered what is usually the sweet spot in its growth cycle. Considering the multiple recessions, it is normal for the yield curve to steepen as the US and global economies recover. By “rise,” I mean the spread between short-term and long-term Treasury bond yields widens. When this happens, Annaly can usually earn a higher return on the MBS she buys, which expands her net interest margin.
We are also on the cusp of a Federal Reserve tightening cycle. With inflation hitting a 40-year high of 7% in December, the country’s central bank will seek to raise interest rates. While this tends to create a short-term downside reaction in mortgage REITs like Annaly – i.e. higher lending rates will increase short-term borrowing costs – it actually improves the returns Annaly receives on the MBS she buys over the longer term.
As long as the Fed continues to slow down and clearly define its monetary policy changes, Annaly is in excellent shape to maintain a double-digit return.
Sabra Health Care REIT: yield of 9.27%
Another piece of the ultra-high return puzzle that can help you generate over $10,000 in annual income with an investment of less than $100,000 is Sabra Healthcare REIT (NASDAQ: SBRA).
There’s no sweetening that Sabra Health Care has faced great challenges over the past two years. Sabra leases over 400 healthcare properties, many of which are skilled nursing facilities and senior residences. With the coronavirus pandemic hitting older people and skilled nurses particularly hard, occupancy rates have been hit hard.
However, we are seeing tangible signs that the worst of the pandemic is now clearly in the rearview mirror, even as new variants of COVID-19 continue to emerge. Sabra noted that average occupancy rates at its skilled nursing and senior housing facilities bottomed out in December 2020 and February 2021, respectively. As nationwide COVID-19 vaccination rates increase and new drugs hit pharmacy shelves, the path to normalcy draws closer.
In addition, Sabra Health Care recently faced the biggest gray cloud hanging over its business. Avamere, which leases 27 facilities in Sabra, is struggling due to COVID-19. On February 2, Sabra announced an amended head lease agreement with Avamere that will reduce its rental income, but it gives the company the opportunity to recoup what has been lost as the landscape of skilled nursing and housing for elderly straightens. With rental income from these 27 leases, spanning nearly another decade, no longer in doubt, investors can focus on the fact that nearly all of Sabra’s tenants (99.7%) pay their rent on time.
It should be noted that Sabra Health Care has also not been on the defensive during the pandemic. Although it reworked its deal with Avamere, it also invested $397 million in the first nine months of 2021 to acquire new assets. These assets have a strong weighted average cash yield of 7.55%.
With America’s senior population expected to grow dramatically over the next two decades, senior-focused REITs like Sabra Health Care are in the driver’s seat to reap big profits.
AGNC Investment Corp. : 9.99% yield
It’s such a nice industry, I’ll mention it twice! If Annaly is the Batman of mortgage REITs, AGNC Investment Corp. (NASDAQ: AGNC) is most definitely Robin. AGNC has maintained double-digit performance for 12 of the past 13 years. So its 9.99% yield is actually historically low for the company.
The operating model described with Annaly is indeed valid for AGNC. This is a company that seeks to borrow at low short-term rates and use that capital to acquire fixed 15- and 30-year MBS with the highest possible yields. As the US economy regains its footing, a steepening yield curve should work in favor of the company.
But there is more that motivates AGNC Investment. For example, this is a company that focuses almost exclusively on buying agency assets. Agency security is backed by the federal government in the unlikely event of a default. At the end of 2021, $79.7 billion of AGNC’s $82 billion in assets were agency securities.
On the one hand, the additional protection accompanying agency assets reduces the return AGNC Investment can expect to receive from the MBS it purchases. On the other hand, this protection is what allows the company (and Annaly Capital Management, for that matter) to deploy leverage to increase its profit potential. This leverage can be particularly useful when the net interest margin widens.
Mortgage REITs also tend to trade close to their respective book values. This makes the evaluation of companies in the sector quite simple. With AGNC and Annaly shares currently below their book value, history suggests they are making smart purchases.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Sean Williams owns Annaly Capital Management. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.