There are a lot of ways to make money on Wall Street, but few have proved more fruitful over the long run than buying dividend stocks.
Back in 2013, J.P. Morgan Asset Management unveiled a report examining the performance of dividend stocks to non-payers over a four-decade time frame (1972-2012). During this period, income stocks averaged an annual return of 9.5%, which meant that investors were doubling their money, on average, every 7.6 years. By comparison, the companies that didn’t pay a dividend clawed their way to a meager average annual return of 1.6%.
Even if we didn’t know the magnitude of difference between the average annual return of dividend stocks and non-dividend payers, these results aren’t surprising. Businesses that pay a regular dividend are often profitable, time-tested, and can provide transparent long-term outlooks. In other words, they should increase in value over time.
With market volatility picking up big time, dividend stocks might be the perfect way to position your portfolio for success throughout the remainder of the decade. The following three high-yield stocks (i.e., yields 4% and above) all have the tools and intangibles needed to turn a $300,000 initial investment into $1 million, including dividends paid, by 2030.
Walgreens Boots Alliance: 4.41% yield
The first high-yield income stock that can help investors generate a 233% total return in eight years is pharmacy chain Walgreens Boots Alliance (WBA 0.90%). Walgreens is currently paying out a 4.41% yield and has raised its base annual payout in each of the past 46 years.
Generally, healthcare stocks are a relatively safe investment no matter how well or poorly the U.S. economy is performing. Since we have no control over when we get sick or what ailment(s) we develop, there’s a steady demand for prescription drugs, medical devices, and healthcare services.
However, Walgreens and its pharmacy peers found out the hard way that there are exceptions to the rule. Since pharmacies rely heavily on foot traffic, they were adversely affected by the COVID-19 pandemic. Walgreens saw weakness in its front-end retail sales, as well as its clinic revenue. But the good news is that this temporary weakness is allowing investors to buy a highly profitable company on the cheap.
Walgreens Boots Alliance is in the midst of executing a multipoint turnaround plan that’s geared at boosting its operating margins, lifting organic growth, and promoting repeat visits and engagement. To improve operating margins, the company is trimming the fat, so to speak. When its fiscal 2021 year ended Aug. 31, 2021, Walgreens announced it had reduced its annual operating expenses by north of $2 billion a full year ahead of schedule.
Yet, while the company is cutting costs, it’s also emphasizing digitization initiatives designed to promote convenience. Even though Walgreens’ brick-and-mortar locations will continue to generate the bulk of its revenue, encouraging consumers to purchase online should provide a nice sales boost.
There’s also Walgreens’ partnership with and majority investment in VillageMD. The duo have opened over 100 co-located clinics thus far, with a goal of reaching 1,000 clinics in more than 30 U.S. markets by 2027. The differentiating factor with these clinics is that they’re physician-staffed. Being able to handle more than just a sniffle should encourage repeat visits and bolster consumer engagement with the Walgreens brand.
Antero Midstream: 9.16% yield
A second high-yield dividend stock with the ability to turn $300,000 into a cool $1 million by 2030 is energy middleman Antero Midstream (AM 4.94%). Antero is yielding 9.16% at the time of this writing, which means its passive income alone, when reinvested, can double your money by 2030.
For some folks, the thought of putting their money to work in oil and gas stocks is enough to make them cringe. Let’s not forget that crude oil demand fell off a cliff 25 months ago during the initial stage of the pandemic. Ultimately, oil futures briefly traded as low as negative $40 a barrel.
As you can imagine, companies involved in oil and natural gas drilling were clobbered by this historic demand drawdown. However, midstream companies like Antero were in far better shape. Midstream businesses operate the infrastructure that helps move, transport, and sometimes refine, oil, natural gas, and natural gas liquids. In Antero Midstream’s case, it provides gathering, compression, processing, and water delivery for parent company Antero Resources (AR 0.31%). The latter is one of the largest producers of natural gas in the United States.
There are three factors that make Antero such a rock-solid investment over the next eight years. First, there’s the structuring of Antero Midstream’s contracts with its parent company. Midstream providers typically rely on volume-based or fixed-fee contracts to ensure a highly predictable level of operating cash flow each year. This means that even if the price of natural gas whipsaws, Antero Midstream will have clarity on its annual operating cash flow.
Secondly, Antero Resources is stepping up drilling on Antero Midstream’s acreage. Although the latter did reduce its quarterly distribution by 27% in 2021 (again, still yielding 9.16%), this move was made so additional capital can be allocated for future infrastructure projects. Management expects $400 million in added incremental free cash flow by the midpoint of the decade.
And third, a big rebound in the price of natural gas, coupled with Antero Resources desire to boost production, has allowed Antero Midstream to improve its balance sheet. After ending 2020 with a leverage ratio of 3.1, the company anticipates this leverage ratio dipping below 1 by the end of the year.
AGNC Investment Corp.: 11.86% yield
The third and final high-yield income stock that can allow patient investors to turn $300,000 into $1 million by 2030 is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 2.31%). AGNC has averaged a double-digit yield in 12 of the past 13 years. Reinvesting these payouts at an 11.86% yield would net more than a 150% return from the initial investment by the end of 2030.
Although the securities AGNC buys can be a bit complicated, the company’s operating model is pretty easy to understand. Mortgage REITs are typically looking to borrow money at low short-term rates, then use this capital to acquire higher-yielding long-term assets, such a mortgage-backed securities (MBS). The bigger the difference (known as net interest margin) between the average yield on owned assets minus the average borrowing rate, often the more profitable the mortgage REIT.
Over the past couple of months, things couldn’t have gone any worse for mortgage REITs. Historically high inflation has encouraged the Fed to get aggressive with interest rates, which means short-term borrowing costs are rising. At the same time, the interest rate yield curve flattened. The yield curve describes the difference between short-and-long-term U.S. Treasury bond yields. When the yield curve flattens, net interest margin and book values for mortgage REITs usually decline.
However, when things look their bleakest is historically when it’s the best time to buy into the mortgage REIT industry. For instance, even though rising interest rates are weighing on the industry in the short-term, higher rates should also increase the yields on the MBSs that AGNC is purchasing. Over time, this is a recipe for net interest margin expansion.
Another really important piece of the puzzle is the makeup of AGNC’s investment portfolio. The company ended March with a $68.6 billion investment portfolio, 97.5% of which were agency assets. An “agency” security is backed by the federal government in the event of default. While investing in these safe securities does lower the yield AGNC receives on the MBSs it buys, it also allows the company to deploy leverage in order to increase its profits.
Over the next eight years, there’s a good chance AGNC’s book value will increase and its share price will follow. When coupled with its mammoth monthly dividend, there exists a recipe for substantial wealth creation.