Of the many successful strategies investors can choose from, perhaps none has a better track record than buying dividend-paying stocks.
In 2013, JP Morgan Asset Management, a division of JPMorgan Chase, published a study comparing the performance of publicly traded stocks paying a dividend to those offering no payout over a period of four decades (1972-2012). The results showed that income stocks mopped the floor with non-dividend payers. With an average annual return of 9.5%, dividend stocks have doubled investors’ money, on average, every 7.6 years. In comparison, non-payers earned only an average annual return of 1.6%.
While we didn’t know the magnitude of this 40-year outperformance, it was highly predictable that dividend-paying stocks would leave nonpayers to eat their dust. Companies that regularly pay a dividend are often consistently profitable, have a proven track record, and have transparent prospects. These are exactly the sort of companies we expect to rise in value over time, and the perfect stocks to consider buying in a turbulent market fueled by historically high inflation.
If you were to invest $93,200 (divided equally) in the following three ultra high yielding dividend stocks – I arbitrarily define an “ultra high yielding stock” as yielding 7% or more – they could, with their yield combined average of 10.73%, produce annual dividend income of $10,000.
AGNC Investment Corp. : yield of 12.98%
The first super high-yielding stock that can really line investors’ pockets with passive income is the Mortgage Real Estate Investment Trust (REIT). AGNC Investment Corp. (AGNC -4.27%). Not only is AGNC a monthly dividend payer, but it has rewarded its shareholders with double-digit returns in 12 of the past 13 years.
Without getting too complicated, mortgage REITs aim to borrow money at low short-term lending rates and use that capital to buy higher-yielding long-term assets, such as mortgage-backed securities. (MBS). The objective is to widen the gap between the average return on assets held minus the average borrowing rate. This “spread” is officially known as the net interest margin.
Mortgage REITs like AGNC have been burned over the past two months for two main reasons. First, the Federal Reserve has become hawkish and is expected to raise interest rates multiple times this year. Higher interest rates should lead to higher borrowing rates. The second issue is the flattening of the interest rate curve (i.e. the spread between short-term and long-term Treasury bond yields). When the yield curve flattens, the net interest margin tends to decrease.
While things aren’t ideal at the moment for AGNC, history has shown that flat yield curves don’t last very long. Additionally, higher interest rates should have a positive effect on the returns the company receives from future purchases of MBS. In other words, patient investors should see a healthy expansion in AGNC’s net interest margin.
Investors should also feel safe knowing that $79.7 billion of AGNC’s $82 billion investment portfolio, as of December 31, 2021, is made up of agency securities. An agency asset is guaranteed by the federal government in the event of default. This added protection is what allows AGNC to prudently deploy leverage to increase its profit potential.
Historically, stock prices of mortgage REITs have remained close to their respective book values. With AGNC valued at 30% off its tangible net book value, it’s not just a passive income powerhouse, but an absolute bargain from an investment perspective.
Sabra Health Care REIT: return of 10.16%
Another stock with a double-digit yield that can help investors earn $10,000 in annual dividend income is Sabra Healthcare REIT (SBRA -3.47%). Sabra has fluctuated fairly consistently between a 6% and 11% return over the past six years, which puts its current return of 10.2% at the high end of its recent range.
At the end of 2021, Sabra had 416 healthcare facilities – that is, skilled nursing and senior housing communities – in the United States. The COVID-19 pandemic was, at least initially, an absolute disaster for this company. Even though Sabra leases, not operates, these healthcare facilities, COVID-19 has had an outright negative impact on seniors. This has resulted in lower housing occupancy rates for skilled nurses and elderly people and the real possibility that Sabra tenants will not pay rent.
However, things have improved markedly since the start of 2021. Occupancy rates for seniors in skilled nursing and senior residences bottomed out more than a year ago. As vaccination rates increase and COVID-19 (likely) becomes endemic, occupancy rates are expected to continue to rise. Overall, Sabra has collected 99.6% of its projected rents since the start of the pandemic.
Sabra has also reworked a master lease agreement with an anchor tenant (Avamere) that has struggled during the pandemic. This recently amended agreement gives Avamere some short-term flexibility, while allowing Sabra to generate more future rent if Avamere’s operating performance improves.
While higher interest rates are certainly a concern for a company that goes into debt to acquire new healthcare facilities – Sabra invested $419 million in new investments last year – it is also impossible to ignore Sabra’s perfect positioning as America’s baby boomer population ages. America’s baby boomers are expected to propel Sabra Health Care’s rental pricing power for decades to come.
Antero Midstream: yield of 9.05%
The third and final ultra high yielding dividend stock that can generate tons of annual income is Antero Midstream (A M -4.11%). Antero’s nearly 9.1% yield is the lowest on this list, but would still top the 12-month inflation rate of 8.5% in March in the United States.
For some investors, the idea of making money work in the oil and gas industry may not be appealing. Let’s not forget that demand for crude oil fell off a cliff due to the pandemic two years ago and briefly pushed West Texas Intermediate crude oil futures deep into negative territory. However, Antero Midstream is a completely different beast that has been immune to the wild wavering seen in the oil and natural gas markets.
As the name suggests, Antero is a mid-tier provider, not a driller. It is a fancy way of saying that it manages the intermediary work in the energy complex. Specifically, it deals with the collection, compression, treatment and delivery of water for the natural gas producer Antero Resources in the Appalachian Basin. Intermediary providers typically rely on flat-rate or volume-based contracts, leaving little uncertainty regarding annual operating cash flow. Having a transparent outlook allows intermediary providers to disburse capital for infrastructure projects without impinging on profitability or a quarterly distribution.
One of the most interesting things investors might notice about Antero Midstream is that the company actually cut its payout by 27% last year. Normally, dividend cuts would be a red flag; but not in this case. Antero Resources plans to increase its natural gas drilling activity on the acreage held by Antero Midstream. Reducing its distribution is simply a way for the latter to devote more capital to new infrastructure. Dropping distributions a bit now should generate $400 million of additional free cash flow by the middle of the decade.
In addition to an expected growth spurt, Antero Midstream has reduced its net debt by more than $1.6 billion since the end of 2019 and plans to reduce its leverage ratio from 3.1 at the end of 2020 to less than 1 d by the end of this year. . With natural gas prices soaring and demand growing, Antero’s 9%+ return looks rock solid.