Investing in 2022 has been an adventure – to put it mildly! The first six months of the year saw the sea S&P500 deliver its worst first-half performance since 1970. Meanwhile, growth stocks have been burned. Centered growth Nasdaq Compound plunged as much as 34% from its all-time high reached in November 2021.
While this year has really tested investors’ resolve, it has also rolled out the red carpet for long-term investors to buy high-quality stocks at a discount. Although much of the focus over the past two years has been on fast-growing companies, some dividend-paying stocks have become particularly attractive.
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Companies that pay a regular dividend are often profitable, proven, and offer transparent growth prospects. The icing on the cake, dividend stocks have a rich history of outperforming stocks that don’t offer a payout. Income stocks are the perfect place to consider growing your money in such an uncertain environment.
Of course, not all dividend stocks are created equal. The following are three ultra high yielding dividend stocks – an arbitrary term I use to describe income stocks with yields of at least 7% – that have the ability to turn an initial investment of $350,000 into $1 million by 2030.
Enterprise Product Partners: 7.39% return
The first passive income powerhouse that can deliver a return of 186% (or more) on an initial investment of $350,000 by 2030 is the oil and gas stock Enterprise Product Partners (EPD 1.16%).
For some investors, the thought of putting money to work in an oil stock sends shivers down your spine. Just over two years ago, the historic decline in demand associated with the COVID-19 pandemic sent crude oil and natural gas prices plummeting. In some cases, highly leveraged drilling companies have lost 80% or more of their value.
However, this is not a problem that the shareholders of Enterprise Products Partners will deal with. This is because Enterprise Products Partners is a midstream energy company. Intermediate suppliers are similar to intermediaries in the energy complex. They provide transmission pipelines, storage space and processing facilities.
What makes Enterprise Products Partners such a safe energy stock is that, like many other midstream oil and gas stocks, it relies on fixed-price contracts. There are few, if any, surprises when it comes to the company’s operating cash flow in any given year. Accurate cash forecasting is imperative because it allows the company to distribute distributions, set aside capital for new infrastructure, and make acquisitions, all without hurting profitability.
Speaking of new infrastructure projects, the company has about $5.5 billion tied up in new or upgraded infrastructure. Many of these projects are expected to be commissioned between early 2023 and the first half of 2024. With growing domestic energy needs, this investment is expected to pay off in the form of increased operating cash flow while throughout the decade.
If you still need more convincing, consider that Enterprise Products Partners recently increased its basic annual distribution for the 24th consecutive year since its IPO. With a healthy payout coverage ratio and historically high crude prices likely to encourage drillers to increase production, Enterprise Products Partners is perfectly positioned to thrive this decade.
Innovative Industrial Properties: 7.41% yield
A second ultra-high-yielding dividend stock with all the tools to turn $350,000 into $1 million by the end of the decade is a cannabis-focused real estate investment trust (REIT). Innovative industrial properties (IIPR 2.15%)or IIP for short.
Like any real estate SIR, IIP aims to acquire assets that it can rent out for long periods. In this case, IIP purchases marijuana growing and processing facilities and leases them for long periods of time. As of August 3, 2022, the company owned 110 properties covering 8.6 million square feet of rental space in 19 legalized states. Although the company stopped reporting its weighted average lease term earlier this year, it was north of 16 years when last checked.
Although Innovative Industrial Properties derives most of its revenue from acquisitions, it incorporates a component of organic growth. Each year, the company passes on inflationary rent increases to its tenants and collects a property management fee of 1.5% on a monthly basis. These latter charges are tied to the tenant’s base annual rental rate.
It is generally an operating model that generates transparent and predictable cash flows. But as IIP learned recently, it’s not foolproof. One of the company’s largest tenants, Kings Garden, failed to pay its July rent. IIP is in talks with Kings Garden about this and has pitched the idea of leasing Kings’ facilities to other multi-state operators. But even with this setback, IIP continues to collect rents from its multitude of tenants and is not in danger of defaulting on its juicy dividend payment obligations.
Speaking of dividend payouts, Innovative Industrial Properties has increased its quarterly payout by (drum roll) 1,067% over the past five years. While the pace of its distribution growth is likely to slow as macroeconomic headwinds take their toll, it’s a hearty payout that may continue to grow at a more modest pace throughout the decade.
Finally, Innovative Industrial Properties is likely to benefit to marijuana which remains federally illegal. The company’s sale-leaseback agreement allows the company to buy properties for cash and immediately lease them to the seller. This provides much-needed liquidity to multi-state operators who may not have access to traditional financial services. Meanwhile, he networks IIP’s long-term tenants.
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AGNC Investment Corp. : yield of 11.76%
The third ultra-high yielding dividend stock that can turn $350,000 into $1 million by 2030 is the Mortgage REIT AGNC Investment Corp. (AGNC 0.79%). AGNC has the highest return on this list (11.8%) and has averaged double-digit returns in 12 of the past 13 years.
Although the purchase of mortgage-backed securities by REITs can be somewhat complicated, their operating model is simple. Companies like AGNC aim to borrow money at the lowest possible short-term rate and buy higher-yielding long-term assets. These higher-yielding assets are almost always mortgage-backed securities (MBS), hence the name of this class of REIT. The greater the yield spread (known as the net interest margin) between the long-term assets held by mortgage REITs and their short-term borrowing rate, normally the more profitable they are.
What makes AGNC so attractive to patient income investors is that the industry is transparent. If you watch the Federal Reserve’s monetary policy and the Treasury yield curve closely, you can pretty much tell exactly how well or poorly mortgage REITs are doing.
Over the past two quarters, AGNC and its peers have faced an uphill battle. Historically high inflation forced the country’s central bank to become aggressive on interest rates, which quickly drove up short-term borrowing costs. To add, the yield curve has flattened or, at times, inverted. These headwinds tend to weigh on AGNC’s book value and reduce its net interest margin.
But the interesting thing about mortgage REITs is that they make great bad news buys. When things look worse, that’s often the best time to buy. For example, the interest rate curve spends a disproportionate amount of time going up and to the right. The reason? The US economy spends much more time expanding than contracting.
Plus, higher interest rates aren’t the land mine you might think they would be for an interest rate-sensitive company like AGNC. Although this has hurt short-term borrowing costs, rising interest rates will eventually increase the returns of the MBS the company purchases. Over time, this is a recipe for a wider net interest margin.
Another reason AGNC can excel is in its investment portfolio. At the end of June, $59.5 billion of its $61.3 billion in assets were in agency securities. An “agency” asset is guaranteed by the federal government in the event of default. This radical protection allows the company to use leverage wisely to increase its profits.
AGNC may not have the growth potential of enterprise product partners or innovative industrial properties, but its supercharged dividend and improved net interest margin can pack a punch over the next eight years.