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3 Ultra-High-Yield Dividend Stocks That Are the Real Deal

The most successful investment portfolios typically share one common denominator over the long run: a solid dose of dividend stocks.

While dividend stocks may not seem sexy on the surface, they have a history of running circles around their non-dividend-paying peers. In fact, a 2013 J.P. Morgan Asset Management report found that companies that initiated and grew their dividend payouts between 1972 and 2012 delivered an average annual return of 9.5%. This compares to a more modest average annual return of 1.6% for non-dividend-paying stocks over the same time frame.

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This data really shouldn't be surprising given that dividend stocks are often profitable and time-tested businesses, making them an intriguing choice for long-term investors.

The biggest challenge with dividend stocks is balancing the desire for income with risk. You see, the higher a stock's yield, typically the greater the risk. Since yield is simply a function of payout relative to share price, a company with a struggling or failing business model -- and therefore a declining share price -- could lure in unsuspecting income investors with a high yield. That makes ultra-high-yield dividend stocks particularly risky.

However, I view the following three ultra-high-yield dividend stocks as the real deal. Though their dividends could fluctuate a bit, their yields should remain in very high-yield territory.

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Annaly Capital Management: 10.5% yield

Although mortgage real estate investment trusts (REITs) have performed poorly in recent years, the biggest mortgage REIT of the group, Annaly Capital Management (NYSE: NLY), has an income stream that long-term investors can now trust.

Mortgage REITs like Annaly make their money by borrowing at short-term lending rates and using leverage to purchase assets, such as mortgage-backed securities (MBS), with higher long-term yields. The difference between these higher long-term yields and short-term borrowing rates is the company's net interest margin, with a wider gap in these two figures translating into more net interest income (NII) for Annaly.

Generally speaking, mortgage REITs generate higher NII when interest rates are low or falling. Conversely, higher rates or rising rates tend to shrink net interest margin, resulting in lower NII and the potential for a dividend cut.

Between December 2015 and December 2018, the Federal Reserve wound up raising interest rates nine times by 25 basis points, pressuring Annaly's net interest margin. However, 2019 saw three rate cuts of 25 basis points each, and the Fed announcing that it would stand pat on rates for the foreseeable future. Since lower or falling rates tend to favor Annaly, the expectation should be for flat to expanding NII over the next couple of years.

Furthermore, since Annaly almost exclusively purchases agency-only assets, its MBSs are protected by the federal government in the event of a default. As long as interest rates don't rise rapidly anytime soon, Annaly is set up to deliver substantive income to investors.

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Antero Midstream Partners: 17.5% yield

Another company that hasn't exactly performed as expected is midstream natural gas pipeline and storage provider Antero Midstream Partners (NYSE: AM). But make no mistake about it, the company's double-digit yield looks as if it's here to stay.

As my energy-focused colleague Matt DiLallo recently discussed, Antero's problems primarily tie into unmet promises and weaker-than-expected natural gas prices. Antero Midstream shed nearly a third of its value last year when its distributable cash guidance of $655 million to $665 million came in about $45 million below the midpoint of its guidance issued in January 2019. While this proved disappointing, there are reasons to be excited about the future.

For one, Antero Midstream continues to focus on growing its infrastructure and taking care of its shareholders. Even though pulling back a bit on capital expenditures and distributable cash wasn't expected, the company still announced a $300 million share repurchase program in 2019. If fully executed, it could reduce the company's outstanding share count by about 8%.

Antero Midstream is also expected to stay busy as the middleman for Antero Resources in the Marcellus shale and Utica shale region of Appalachia. In particular, natural gas liquids demand could potentially quadruple between 2018 and 2030, providing plenty of predictable, fee-based opportunity for Antero Midstream's infrastructure.

And even if the company's coverage ratio drops below 1 and it's forced to reduce its payout, I view it as highly unlikely that Antero's yield dips below 10%. Income seekers can count on this ultra-high-yield stock to deliver for a long time.

Image source: Getty Images.

Mobile TeleSystems: 8.7% yield

Lastly, high-yield seekers can place their trust into Mobile TeleSystems (NYSE: MBT), one of Russia's largest wireless companies.

In recent years, there have been two core concerns that have surrounded Mobile TeleSystems. First, there's the instability of Russia's ruble, which has on more than one occasion caused turbulence in the company's bottom line. Secondly, there's Russia's already high wireless penetration rates, which has Wall Street concerned about the company's growth prospects. Thankfully, neither issue looks to be as concerning as it sounds.

The biggest upcoming catalyst for Mobile TeleSystems is the rollout of 5G networks in major cities and the continued upgrade of infrastructure to 4G and LTE networks in outlying cities. These considerably faster networks should encourage consumers to upgrade their smartphones, leading to an uptick in data consumption. Since data is primarily where this company generates its profits, this upgrade cycle should put some serious pep into its bottom line.

What's more, Mobile TeleSystems has branched off into a number of other ventures in order to boost its growth potential. For example, the company has seen significant strength from its cloud operations, and the incorporation of MTS Bank led to 85% year-over-year loan growth in the third quarter.

Telecoms may not be able to deliver double-digit growth rates, but Mobile TeleSystems' 8.7% yield might be the most rock-solid of this ultra-high-yield group.

10 stocks we like better than Annaly Capital Management
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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