Although there is no shortage of strategies that can prove profitable on Wall Street, buying dividend stocks is arguably the surest way to ensure your wealth grows -- and the long-term data confirms it.
In 2013, a report from J.P. Morgan Asset Management compared the performance of companies initiating and growing their payouts between 1972 and 2012 to publicly traded companies that didn't pay a dividend over the same stretch. The result? Dividend-paying stocks averaged an annual return of 9.5%, which if reinvested would have doubled investors' money every 7.6 years. By comparison, non-dividend-paying stocks clawed their way to an annualized return of just 1.6%.
Dividend stocks are a smart way to grow your wealth and crush inflation in the process. If you've got $100,000 ready to put to work, which won't be needed for emergencies or bills, the following quartet of ultra-high-yield dividend stocks could collectively net you close to $8,700 in annual income (an aggregate 8.7% yield). Note, this assumes equal investments (a $25,000 purchase, rounded down to the nearest whole share) in all four companies.
Image source: Getty Images.
Enterprise Products Partners: 8.1% yield and $2023.20 in annual income
Energy stocks are usually a good bet to deliver market-topping income. However, the return potential with midstream energy company Enterprise Products Partners (EPD -0.45%) is truly something special. A $25,000 investment in Enterprise Products Partners could purchase 1,124 shares, as of Sept. 14. Based on the company's $1.80 base annual payout, income investors can expect to collect about $2,023 in 12 months. Keep in mind, though, that this company has increased its base payout for 22 consecutive years.
While oil stocks probably aren't at the top of investors' buy lists after the coronavirus pandemic led to a historic drawdown in crude oil demand in 2020, midstream companies are a different beast. Companies like Enterprise Products provide the means to transport and store oil, natural gas, and natural gas liquids. This company has more than 50,000 miles of pipeline and 14 billion cubic feet of natural gas storage in the U.S.
The great thing about Enterprise Products Partners is its contract arrangements. These contracts are designed in such a way that, no matter how volatile oil and natural gas prices are, the company can count on predictable cash flow each quarter. Having a good understanding of how much money is coming in makes it easy for management to outlay money for projects without adversely affecting profitability or the dividend.
What's more, even during the worst of the pandemic, Enterprise Products Partners' distribution coverage ratio didn't dip below 1.6. A figure below 1 would signify an unsustainable payout. There's an ample buffer here to support this robust 8.1% yield.
Image source: Getty Images.
AGNC Investment Corp.: 9% yield and $2,259.36 in annual income
Although it hasn't been a favorite Wall Street industry over the past decade, mortgage real estate investment trusts (REITs) look poised to shine. If investors were to put $25,000 to work in AGNC Investment Corp. (AGNC -2.43%), as of Sept. 14, they could gobble up 1,569 shares and enjoy a base annual payout of $1.44 per share. This would lead to $2,259 in annual income. As an added note, AGNC pays its dividend monthly.
Mortgage REITs are companies that borrow money at short-term lending rates and use this capital to buy higher-yielding long-term assets, such as mortgage-backed securities. The goal here is to maximize the difference between the average long-term yield and the average borrowing rate. This difference is known as net interest margin.
Here's the kicker: During the early stages of an economic recovery, the yield curve usually steepens. This is a fancy way of saying that long-term bond yields rise while short-term bond yields flatten or even decline. If this yield curve steepening is accompanied by a clear plan by the Federal Reserve (i.e., the nation's central bank isn't rapidly changing interest rates), it's often great news for the profit potential of mortgage REITs like AGNC.
Should you need one more boost of confidence, take note that AGNC Investment has averaged a double-digit percentage yield in 11 of the past 12 years.
Image source: Getty Images.
Altria Group: 7.4% yield and $1,857.60 in annual income
Though not the growth story it once was, tobacco stock Altria Group (MO 2.15%) continues to rake in the dough for income investors with a yield north of 7%. A $25,000 investment in Altria, the company behind the popular Marlboro tobacco brand, could purchase 516 shares, as of Sept. 14. Based on its annual payout of $3.60 a share, Altria's investors would rake in close to $1,858 in annual dividend income.
Despite a relatively steady decline in the percentage of smoking adults in the U.S., Altria's tobacco sales have continued to rise. This has to do with the incredible pricing power behind nicotine-containing products. Controlling roughly half the premium cigarette market with Marlboro allows Altria to pass along price hikes and drive modest top-line growth.
But Altria isn't content simply raising prices to achieve better results. It's licensed the smokeless tobacco system IQOS from Philip Morris International, and made a $1.8 billion investment into Canadian marijuana stock Cronos Groupin 2019. The predictability of Altria's cash flow affords the company a number of ancillary opportunities that could offset volume weakness from cigarette sales.
The bottom line with Altria is that investors are getting a company committed to a juicy dividend and regular share buybacks. For patient income investors, this is a wealth-building recipe.
Image source: Getty Images.
Annaly Capital Management: 10.2% yield and $2,545.84 in annual income
Last, but certainly not least, we have mortgage REIT Annaly Capital Management (NLY -2.61%). Yes, another mortgage REIT. Among ultra-high-yield dividend stocks, Annaly just might be the most attractive company you can invest in right now. With $25,000, you could purchase 2,893 shares of Annaly, as of Sept. 14. Taking into account a base annual payout of $0.88, dividend investors would collect close to $2,546 in 12 months.
As with AGNC, Annaly is set to benefit from a likely expansion of the yield curve. Since mortgage REIT share prices often hover near their book value, the combination of an economic recovery and a steepening yield curve usually leads to share price appreciation, as well.
Something to take note of with Annaly -- as well as AGNC -- is that it invests almost exclusively in agency securities. Agency assets are backed by the federal government in the event of default. As you can imagine, having this protection tends to weigh down the yield potential of agency securities. At the same time, having this default protection allows Annaly to prudently use leverage to increase its profit potential.
Since its inception in 2000, Annaly has doled out more than $20 billion in dividends and has averaged a yield of roughly 10% over the past two decades. It may not be a Wall Street favorite, but it's a serious income stock that can crush inflation over the long run.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
