Want $ 1,500 in quarterly dividend income? Invest $ 63,000 in these stocks
While there is no shortage of effective money making strategies on Wall Street, buying dividend stocks has been a particularly smart way to build wealth.
In 2013, the JP Morgan Asset Management division of JPMorgan Chase published a report examining the average annual return of companies that initiated and increased their dividends between 1972 and 2012, compared to publicly traded companies that did not pay a dividend during the same period. The difference in average annual yield was night and day. Dividend-paying stocks have posted an average annual return of 9.5% over the four decades, while non-dividend-paying stocks have generated a paltry 1.6% annualized return.
The biggest dilemma that investors face when it comes to income is wanting the highest possible return with the least amount of risk. Unfortunately, once you hit the high yield space (4% and above), return and risk tend to be correlated.
But that doesn’t mean all high-yielding dividend stocks are bad news. If you wanted to sit down and collect $ 1,500 in quarterly dividend income, you could do that by setting up an initial investment of $ 63,000 and dividing it evenly among the following four stocks, which have an average return of 9, 53%.
Enterprise Product Partners: 8.36% return
If there is a leading ultra-high dividend energy stock, its master limited partnership Enterprise Product Partners (NYSE: EPD). Its return of almost 8.4% is, surprisingly, the lowest on this list. However, the company has increased its base annual payout for 22 consecutive years, making it one of the safest super high yield stocks on the planet.
For most income investors, the ideas of âsafeâ and âoil stocksâ probably don’t fit together. The historic drop in demand for crude oil over the past year has shocked upstream drillers. But Enterprise Products Partners was immune to this chaos thanks to its role as a middle-class company.
According to the company, it operates more than 50,000 miles of oil, natural gas and natural gas liquids pipelines across the United States, as well as 14 billion cubic feet of natural gas storage. The beauty of Enterprise Products’ operating model is its very transparent firm purchase agreements. With most of its transport and storage services announced in advance, management is able to shell out capital for new projects without any surprises. This allows for advances in infrastructure and an expansion of long-term cash flow.
If you need more proof that Enterprise Products Partners is rock solid, take a closer look at its distribution coverage rate. At the worst of the pandemic, it did not fall below 1.6 (any figure below 1 would mean an unsustainable payment). Slow, steady growth makes Enterprise Products one of the best income stocks to own.
AGNC investment: yield 8.99%
For those of you who are just eager to get your hands on that dividend income, let me introduce you AGNC investment (NASDAQ: AGNC). AGNC is a Mortgage Real Estate Investment Trust (REIT) that pays its dividend monthly: $ 0.12 per month, which equals a basic annual payment of $ 1.44. It is currently earning around 9%, but has averaged a double-digit return over 11 of the past 12 years.
A mortgage REIT is a company that borrows money at lower short-term borrowing rates with the intention of using that capital to purchase higher-yielding long-term assets, such as asset-backed securities. mortgage loans (MBS). The difference between this long-term average yield and the short-term borrowing rate is called the net interest margin. And, as you can guess, the wider that margin, the greater the profit potential for AGNC and other mortgage REITs.
What makes AGNC so intriguing is that we have stepped into the perfect place where mortgage REITs thrive. Looking at the multiple economic recoveries after a recession, it’s normal for the yield curve to steepen. This describes a situation in which long-term bond yields rise while short-term bond yields fall or flatten. A steepening of the yield curve coupled with transparent monetary policy from the Federal Reserve is generally a recipe for expanding the net interest margin for the mortgage REIT industry.
With the potential for stock price appreciation and a 9% return, AGNC Investment is an income investor’s dream come true.
Antero Midstream: 9.15% return
While Enterprise Products Partners is king of the hill among secure, super-high-performance energy companies, Median antero (NYSE: AM) is a very respectable second violin on this list. This intermediary operator earns almost 9.2% and has a strong track record of returning most of its cash flow to shareholders as a dividend.
Unlike Enterprise Products, Antero was forced to cut distribution earlier this year. Its quarterly payment fell 27% to $ 0.225 from $ 0.308. However, it was not the pandemic that forced this movement. Head quarter Antero Resources (NYSE: AR) increases its natural gas drilling on the dedicated area of ââAntero Midstream. In other words, Antero Midstream reallocated part of the capital that it would normally have paid out in the form of dividends to increase its investment budget and strengthen its transport and storage infrastructure. The dividend cut now and its increased infrastructure spending in 2021 are expected to add $ 400 million in additional free cash flow for Antero Midstream through 2025.
In addition, Antero Midstream had actively repurchased its shares before parent company Antero Resources announced plans to increase natural gas production. Antero Midstream has since put this buyback program on the back burner, but has nonetheless extended the remaining $ 150 million in buyback capacity until the end of 2023. It looks like shareholders will benefit from increased transport / storage needs, higher cash flow, and a possible resumption of this buyback program.
Invesco Mortgage Capital: return 11.61%
Saving the highest return for the end, we have a mortgage REIT Mortgage capital Invesco (NYSE: IVR). Reinvesting your payments with a return of 11.6% would double your initial investment in about six years.
Last year Invesco found itself in a tough spot, and the company’s pulverized share price shows it. The company had in its portfolio a multitude of commercial MBS and credit risk transfer assets that were not agencies. An asset that does not belong to an agency is not guaranteed by the federal government in the event of default. Not having this protection increases the returns mortgage REITs receive. Sadly, a severe recession, like the one experienced during the pandemic, sparked a wave of defaults that REITs simply couldn’t handle.
The good news is that management seems to have learned the lesson. Invesco Mortgage almost exclusively bought the MBS residential agency for its portfolio. Although agency assets have lower returns than non-agency assets, this added protection allows Invesco to use leverage to increase its profit potential.
And, as I noted with AGNC, economic recoveries are generally a positive thing for mortgage REITs. In the second quarter, Invesco Mortgage Capital’s average net interest margin increased 32 basis points to 2.12%, from 1.8% in the sequential first quarter.
It will likely be a bumpier ride with Invesco, compared to AGNC, given its 2020 mistakes and its ongoing stint at the MBS agency. But with agency-focused asset management, Invesco’s super-high-yield payments can once again be trusted.
This article represents the opinion of the author, who may disagree with the âofficialâ 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.