Regardless of your investment style or risk tolerance, Wall Street offers an abundance of ways to grow your wealth. But among these seemingly countless strategies, few have proved more successful over long periods than buying and holding dividend stocks.
When examined over long periods, dividend stocks are practically unbeatable. Last year, Hartford Funds, in collaboration with Ned Davis Research, released a report that examined the average annual returns of dividend stocks to nonpayers over a 50-year stretch (1973-2022). Whereas the nonpayers generated an average annual return of 3.95% and were more volatile than the benchmark S&P 500, the income stocks were less volatile than the S&P 500 and delivered more than double the average annual return (9.18%) of the nonpayers.
The results of these findings are as logical as they sound. Companies that regularly share a percentage of their profits with investors, and that are capable of providing transparent long-term growth outlooks, would be expected to increase in value over the long run.
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However, no two dividend stocks are cut from the same cloth. While it can be tempting to seek businesses with exceptionally high yields, risk and yield tend to correlate on Wall Street. In other words, the higher the yield, often the more vetting and research required by investors.
The good news is there are high-quality, supercharged dividend stocks for opportunistic investors willing to seek them out. This is especially true for investors seeking out a big dividend payday among real estate investment trusts (REITs).
If you want to generate $1,000 in safe annual dividend income, simply invest $11,150 (split equally, three ways) into the following three ultra-high-yield REITs, which sport an average yield of 8.99%!
Realty Income: 5.89% yield
The first ultra-high-yield REIT -- "ultra-high-yield" in the sense that its yield is four or more times higher than the yield of the S&P 500 -- that can deliver sustainable, safe income year in and year out is retail REIT Realty Income (O 1.28%). Realty Income pays its dividend on a monthly basis and has raised its distribution in each of the past 105 quarters.
Admittedly, there's some concern about the health of the U.S. economy and the retail industry at the moment. A rapid increase in interest rates by the Fed, coupled with a few money-based metrics and predictive indicators strongly suggesting a recession is around the corner, has investors skeptical about anything having to do with retail. However, Realty Income's commercial real estate (CRE) portfolio has consistently set the bar for excellence among retail REITs.
Realty Income holds more than 15,400 CRE properties in its portfolio. According to the company, approximately 89% of the total rent collected from its tenants is resilient to economic downturns and online competition.
Furthermore, roughly 40% of its annualized contractual rent originates from the likes of grocery stores, convenience stores, dollar stores, home improvement stores, and drugstores. In other words, these are businesses that are going to draw in consumers no matter how well or poorly the U.S. economy is performing.
Realty Income's management team has been busy looking beyond retail for opportunitiesas well. It's completed two deals in the gaming industry over the past two years, as well as closed on the acquisition of Spirit Realty Capital in January. Buying Spirit Realty Capital complements many of its existing strategies but will allow the combined company to further move beyond retail.
Best of all, Realty Income is historically inexpensive. Shares of this premier retail REIT can be purchased right now for a little over 12 times consensus cash flow estimates this year, which represents a 30% discount to its average price-to-cash-flow ratio over the trailing-five-year period.
Innovative Industrial Properties: 7.54% yield
A second ultra-high-yield REIT that can help you bring home $1,000 in super safe annual dividend income from an initial investment of $11,150 split across three stocks is cannabis REIT Innovative Industrial Properties (IIPR 0.31%), or IIP as it's more commonly known. IIP's quarterly payout has increased by 1,113% since its first dividend was disbursed in July 2017.
Some investors might be reluctant to put their money to work in IIP, given how much of a buzzkill marijuana stocks have been since President Joe Biden entered office. The expectation had been that Biden and a Democrat-led Congress would sign cannabis reform measures into law. However, little progress has been made in moving marijuana toward a legal substance at the federal level.
The interesting thing about IIP is that cannabis remaining illicit has actually helped the company. IIP's sale-leaseback program has been an important tool for multi-state operators (MSOs) with limited access to traditional financial services. IIP purchases medical marijuana cultivation and/or processing assets from MSOs for cash and immediately leases them back to the seller. This leads to a win-win scenario, where the MSO receives much-needed cash and IIP lands a long-term tenant.
Something else that's critical to note about Innovative Industrial Properties' portfolio is that 95.8% of its properties are triple net leased (also known as "NNN-leased"). A triple net lease requires the tenant to cover all property expenses, including utilities, maintenance, property taxes, and even insurance. Though the rental rate is lower with NNN leases, they help remove the prospect of unexpected costs from IIP's plate.
Innovative Industrial Properties' management team also deserves credit for working through a challenging environment in early 2023, which saw a couple of its tenants become delinquent on their rent. After reworking a few master lease agreements and divesting a few properties, IIP is, once again, collecting 100% of its rents on time, as of February 2024. All REITs eventually deal with delinquencies, and IIP's management team successfully worked through these challenges.
Lastly, Innovative Industrial Properties remains reasonably cheap. While its sustained double-digit sales growth days appear to be over for now, shares are trading at a 44% discount to its average multiple to cash flow over the past five years.
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Annaly Capital Management: 13.53% yield
The third ultra-high-yield REIT that can help you rake in $1,000 in safe annual dividend income from a starter investment of $11,150 split equally among three stocks is none other than mortgage REIT Annaly Capital Management (NLY 0.10%). Annaly has declared $25 billion in dividends since its initial public offering in 1997, and it's averaged around a 10% yield over the past two decades.
There may not be an industry that's more universally despised by Wall Street than mortgage REITs. This is an especially interest rate-sensitive industry, which tends to struggle in rising rate environments where short-term borrowing costs are soaring. The Federal Reserve undertaking its most-aggressive rate-hiking cycle in four decades has made for challenging times. Thankfully, brighter days appear to be ahead for Annaly.
To begin with, the nation's central bank is widely expected to commence a rate-easing cycle later this year. While this doesn't mean Treasury yields and interest rates will immediately correct lower, mortgage REITs have historically performed well in falling-rate environments. I'd also add that slow, telegraphed moves by the Fed allow mortgage REITs like Annaly the opportunity to adjust their investment portfolios to their advantage.
Another positive for Annaly is that the Federal Reserve has halted the purchase of mortgage-backed securities (MBS), which is what makes up the bulk of Annaly's asset portfolio. Having less competition for MBSs should allow Annaly to purchase lucrative MBSs of its own and steadily increase its average yield on owned assets over time.
Furthermore, the lion's share of Annaly Capital Management's portfolio -- $65.7 billion out of $74.3 billion -- has been put to work in highly liquid agency assets. An "agency" asset is backed by the federal government in the event of default. Though this added protection does reduce the yield Annaly nets from the MBSs it purchases, it allows the company to prudently deploy leverage to maximize its profit potential.
The icing on the cake is that Annaly is valued slightly below its book value of $19.44 per share, as of Dec. 31. As the Treasury yield curve normalizes in the quarters to come, Annaly's net interest margin should expand. It's a recipe for the company's book value to rise, which is noteworthy, since the share price of most mortgage REITs tends to hover around their reported book value.
Sean Williams has positions in Annaly Capital Management and Innovative Industrial Properties. The Motley Fool has positions in and recommends Innovative Industrial Properties and Realty Income. The Motley Fool has a disclosure policy.
