Over the past century, the stock market has placed itself on a pedestal above all other asset classes. Although investing in Treasuries, real estate, gold, and oil would have increased your nominal wealth, none of these other asset classes came close to the average annual returns generated by stocks over the very long term. term.
What makes Wall Street so special is the diversity of its investments. With thousands of publicly traded companies and exchange-traded funds to choose from, there’s a very good chance that there is an investment vehicle (or 10) to satisfy your company’s goals and risk tolerance level. each.
But among these countless puzzle pieces, few strategies have enjoyed more consistent success than buying and holding stocks. dividend stocks over extended periods.
Last year, investment advisory firm Hartford Funds released a report (“The Power of Dividends: Past, Present and Future”) that analyzed the various ways in which dividend-paying stocks have outperformed their non-dividend-paying public counterparts on the long term. One data set contained in this report was particularly revealing.
Working with Ned Davis Research, Hartford Funds showed that companies paying a regular dividend to their shareholders more than doubled the average annual return of non-payers over a period of 50 years (1973-2023): 9.17% versus 4.27%. Additionally, dividend stocks were 6% less volatile than the benchmark. S&P500while non-payers were, on average, 18% more volatile.
Although dividend stocks have a long history of outperformance, no two income stocks are equal. In some situations, a drop in a stock price can drive up a company’s performance and lure income seekers into a trap. But it’s not always the case.
What follows are two very high-yielding dividend stocks, with an average yield of 9.69%, just waiting to be purchased in June.
It’s time to pounce: Annaly Capital Management (13.2% return)
The number one supercharged dividend stock that has been completely beaten to a pulp over the past decade – the shares are down 58% over 10 years – but is currently a delicious buy for income seekers is the real estate investment trust mortgage. (FPI) Annaly Capital Management (NYSE:NLY). Annaly has returned $25 billion to its shareholders since its October 1997 IPO and currently boasts a staggering 13.2% yield.
There is probably no sector that has been more universally hated by Wall Street analysts for longer than mortgage REITs. The simple explanation for this skepticism has to do with interest rates.
Mortgage REITs are very sensitive to changes in interest rates, as well as the extent of monetary policy implementation. This is an industry that traditionally favors rate easing cycles and transparent monetary policy changes from the country’s central bank. But since March 2022, it’s an industry that’s facing the fastest rate-hike cycle in four decades, as well as the longest inversion of the Treasury yield curve in the modern era — it’s that is, short-term Treasury bonds have higher yields than Treasury bonds. should mature in 10 to 30 years.
While it is undeniable that hawkish monetary policy, which has rapidly increased short-term borrowing rates, is having a negative impact on Annaly’s net interest margin and the book value of its assets, one can make argue that the trend is turning in its favor.
To begin with, we have reached a point where the Federal Reserve has begun to slow its actions. Even in a rising rate environment, Annaly can succeed. It simply needs telegraphed action from the Fed to position its asset portfolio for success. If the Fed continues to hold interest rates or, better yet, begins a slow cycle of rate easing, Annaly should benefit from a modest expansion in its net interest margin.
To add to this point, the Treasury yield curve has historically spent the majority of its time up and to the right. This means that longer-dated bonds generated higher returns than shorter-dated Treasuries. The longer your money is tied up, the higher the return should be. When this current inversion ends, Annaly’s net interest margin and book value may benefit.
If there is a silver lining to the central bank’s hawkish monetary policy, it is that it has stopped purchasing mortgage-backed securities (MBS). With the Fed excluded as a buyer, Annaly and her peers had a clearer path to buy what are now higher-yielding MBS.
Another reason income seekers can confidently turn to Annaly Capital Management is the makeup of its $73.5 billion investment portfolio. The company closed March with $64.7 billion in liquid agency assets. “Agency” securities are guaranteed by the federal government in the event of default. While this additional protection reduces the return Annaly receives compared to non-agency assets, it also allows the firm to operate its portfolio safely to maximize profits. This is how he manages to maintain a double-digit return.
With multiple variables pointing to an increase in long-term net interest margin and book value, Annaly Capital Management appears to be the perfect bad news buy for dividend investors in June.
Time to pounce: Walgreens Boots Alliance (6.17% yield)
The second ultra-high-yielding dividend stock just waiting to be bought by opportunistic income seekers in June is none other than the drugstore chain. Walgreens Boot Alliance (NASDAQ:WBA). Walgreens shares have fallen 83% since hitting an all-time high in 2015, with the company’s yield recently climbing north of 6%.
While not an exhaustive list, Walgreens has been hit with a plethora of headwinds, including:
Growing competition from online pharmacies.
Dispute over its role in the opioid crisis.
Increased shrinkage (theft) in a few major cities where the company operates.
A high level of debt, which is not ideal in an environment of rising rates.
Cut its dividend by almost half in January to increase its cash flow.
While the retail industry’s turnaround won’t happen overnight, Walgreens has the leadership and tools to meet the expectations of its patient shareholders.
As I’ve highlighted in the past, the most significant change Walgreens has undertaken recently has been the replacement of Rosalind Brewer with Tim Wentworth as its new CEO.
Unlike Brewer, who had a background in retail, Wentworth has decades of experience in the healthcare industry. His past roles include CEO of Express Scripts, the nation’s largest pharmacy benefit management company, and founding CEO of Evernorth, Cignathe organization of health services. Having someone with a background in healthcare is critical to the long-term success of Walgreens Boots Alliance.
Wall Street also appears to be ignoring the fact that Walgreens has levers it can pull to reduce expenses and positively impact margins as it faces near-term challenges. In addition to reducing its dividend to a sustainable level, the company is targeting $4.1 billion in overall annual savings.
Additionally, it sold non-core assets and investment positions, presumably in an effort to reduce its outstanding debt and increase its financial flexibility. The sale of its Boots unit in the UK could also be considered as a debt reduction tactic.
Although the transition has been difficult, Walgreens Boots Alliance has turned its attention to healthcare services. Despite a recent writedown of its investment in VillageMD, management remains focused on providing full-service health clinics co-located within its stores. Differentiating through these full-service clinics, while controlling expenses, could drive profitable healthcare outcomes as early as next year.
Don’t overlook the company’s digitalization efforts, either. Although cost reduction is a key turnaround strategy, management has not been afraid to invest in technology to revamp the company’s supply chain or expand its direct-to-consumer website to stimulate organic sales.
Last but not least, the valuation is more convincing than ever. A forward price-to-earnings (P/E) ratio of 5, coupled with the fact that Walgreens Boots Alliance trades at book value, makes for an incredible deal for income seekers willing to be patient.
Should you invest $1,000 in Annaly Capital Management right now?
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Sean Williams holds positions at Annaly Capital Management and Walgreens Boots Alliance. The Motley Fool has no position in any of the securities mentioned. The Mad Motley has a disclosure policy.
It’s Time to Pounce: 2 Ultra-High-Yielding Dividend Stocks Just Begging to Buy in June was originally published by The Motley Fool
