Wall Street has been the talk of the town for the past 12 years. This should come as no surprise, as historically low lending rates and ongoing quantitative easing by the US Federal Reserve have encouraged fast-growing companies to borrow to hire, acquire, and innovate.
But what you may not know is that dividend stocks are the real long-term outperformer in the market. A 2013 report by JP Morgan Asset Management found that companies that initiated and increased their payouts between 1972 and 2012 achieved an average annual return of 9.5%. By comparison, stocks that didn’t pay dividends only posted an annualized return of 1.6% over the same four-decade period.
Because dividend stocks are often profitable and proven, they are the ideal wealth-building vehicle for long-term investors. In fact, the following four perfect dividend stocks have the potential to double investors’ money in seven years or less.
Annaly Capital Management: 10.3% return
First up is my undisputed favorite ultra-high-yield dividend stock, the Mortgage Real Estate Investment Trust (REIT) Annaly Capital Management (NYSE: NLY).
Lots of people look at the mortgage REIT industry and scratch their heads because it sounds complex. The simple gist is that Annaly wants to borrow money at low, short-term rates and uses that capital to buy assets like mortgage-backed securities (MBS) that offer higher returns over the long term. Subtract Annaly’s average loan interest rate from the average long-term rate of return and you get the company’s net interest margin. The larger this margin, the more profitable the company can become. As I said, pretty easy.
What is really important to Annaly is interest rates and a central bank that acts slowly and telegraphs every one of its monetary policy moves. When the Fed moves fast and / or the yield curve flattens, Annaly’s net interest margin usually narrows. In the meantime, when the yield curve steepens and the Fed is slow on rate changes, Annaly tends to widen her net interest margin. Right now we’re in the latter scenario, with Annaly typically having its strongest operational performance in the early years of a bull market.
The bottom line is that Annaly has had an average annual return of around 10% over the past 20 years and has paid back more than $ 20 billion in dividends to its shareholders since its inception. With a return of 10.3%, reinvesting your payout would double your money in seven years – with the share price remaining the same. Given the headwinds favoring the mortgage REIT industry, income investors should enjoy a hefty payout and a modest rise in price.
Innovative industrial real estate: 2.5% return
Marijuana stock Innovative Industrial Properties (NYSE: IIPR) proves that income investors don’t need double-digit returns to double their money over the next seven years.
Innovative Industrial Properties, or IIP for short, is a medical marijuana-focused REIT. It acquires cultivation and processing facilities with the intention of leasing these assets over the long term. As of August 16, 2021, the company owned 74 properties with 6.9 million square feet of lettable space in 18 states. Best of all, all 6.9 million square feet have been rented, with a weighted average rental period of 16.6 years.
Although IIP stopped reporting its return on invested capital over a year ago, its most recently reported return of more than 13% suggests it will get its roughly $ 1.7 billion in tied capital in less than seven years will recover.
While acquisitions remain the driving force behind its growth, it’s worth noting that IIP has incorporated a modest organic growth component into its operating model. It passes an annual rent increase of 3.25% on to its tenants and charges a property management fee of 1.5%, which is tied to the annual base rental price.
Innovative Industrial Properties also benefits from its sale-leaseback program. As long as cannabis remains illegal at the federal level, multistate operators (MSOs) can struggle to gain access to basic banking services. IIP can help fill this role by buying facilities for cash and immediately leasing them back to the seller. This provides MSOs with urgently needed cash and at the same time offsets IIP long-term renters.
In other words, IIP’s rapid growth could double its stock price in less than seven years, with a yield of 2.5% being the icing on the cake.
Mobile TeleSysteme: 11% return
For income investors who want the dividend to do most of the work, Russian telecommunications giant Mobile TeleSystems (NYSE: MBT) could be the answer. Keep in mind that while it has the highest yield on this list at 11%, its semi-annual dividend isn’t set in stone, but rather is based on its operating performance. Over the past five years, the company’s return has fluctuated between 7% and 15%, with an average of around 9%.
One of the biggest catalysts for Mobile TeleSystems, also known as MTS, is the introduction of 5G infrastructure in key markets. The move to 5G, as well as ongoing efforts to make 4G more accessible in smaller cities in Russia, should result in a multi-year wireless upgrade cycle. Even with high cellular saturation rates across Russia, this exchange cycle should drive demand for data and steadily increase MTS cellular and retail margins.
What is remarkable about MTS is that it goes way beyond its role as a pure cell phone company. It has a number of new revenue generating companies including MTS Bank, cloud services, and pay TV subscriptions. MTS saw particularly strong growth in over-the-top paid subscriptions, which rose 189% to around 2.9 million in the first quarter of 2021 compared to the same quarter of the previous year. These sideline activities are growing significantly faster than their wireless activities.
If income investors reinvest their payouts and stay on track while Mobile TeleSystems invests its capital in higher margin companies, they should double their initial investment in less than seven years.
AGNC Investment Corp .: 8.9% return
Did I mention that mortgage REITs are a really smart way for income investors to build wealth? While Annaly is my favorite of the group, there is plenty of room for investors to double up and make big profits from AGNC Investment Corp. (NASDAQ: AGNC).
The premises that applied to Annaly also apply to AGNC. As the yield curve steepens during an economic recovery, we should see AGNC offsetting more favorable returns on its long-term MBSs, which will ultimately increase its net interest margin. We’re in that sweet spot where mortgage REITs can grow their operating income.
What is important at AGNC – and this also applies to Annaly – is that the vast majority of its asset portfolio consists of agency securities. In the event of a default, agency assets are funded by the federal government. On the one hand, this additional protection reduces the return potential of agency securities compared to non-agency investments. However, it also allows AGNC (and Annaly) to judiciously use leverage to their advantage. Since the central bank is slow to execute its monetary policy, the AGNC can rely on leverage to increase its profits.
For the impatient income seeker, you’ll find that AGNC Investment pays out its dividend monthly. Additionally, the average annual return for 11 out of the past 12 years has been 10% or more. All you need is a very modest price increase and reinvestment of your payouts to double your initial investment in seven years or less.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.