For the past century, the stock market has been on a pedestal above all other asset classes. While investing in government bonds, houses, gold and oil would have increased your nominal wealth, none of these other asset classes have come close to the average annual returns that stocks deliver over the very long term.
What makes Wall Street so special is the diversity of 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 ten) that meets everyone’s goals and level of risk tolerance.
But among these countless pieces of the puzzle, few strategies have been more consistently successful than buying and holding dividend stocks over longer timelines.
Last year, investment advisory firm Hartford Funds released a report (“The Power of Dividends: Past, Present, and Future”) that analyzed the various ways dividend stocks have outperformed their non-paying public counterparts over the long term. One data set in this report was particularly telling.
Working with Ned Davis Research, Hartford Funds showed that companies that pay a regular dividend to their shareholders more than doubled the annual average return of non-payers over a 50-year period (1973-2023): 9.17% versus 4 .27%. Furthermore, dividend stocks were 6% less volatile than the benchmark S&P500while non-payers were on average 18% more volatile.
While dividend stocks have a long track record of outperformance, no two income stocks are created the same. In some situations, a plummeting stock price can boost a company’s returns and trap income seekers. But this is not always the case.
What follows are two beaten ultra-high-yield dividend stocks, with an average yield of 9.69%, begging to be bought in June.
Time to strike: Annaly Capital Management (13.2% return)
The first supercharged dividend stock that has been absolutely beaten to a pulp over the past decade — shares are down 58% over ten years — but is a mouthwatering buy for income seekers right now is a mortgage real estate investment trust (REIT) Annaly Capital Management (NYSE: NLY). Annaly has returned $25 billion to its shareholders since its initial public offering in October 1997 and currently yields an astonishing 13.2%.
There’s probably no sector that Wall Street analysts have hated more than mortgage REITs. The simple explanation behind this skepticism has to do with interest rates.
Mortgage REITs are highly sensitive to changes in interest rates, as well as the extent to which monetary policy is implemented. This is a sector that has traditionally favored interest rate easing cycles and transparent monetary policy changes from the country’s central bank. But as of March 2022, it has been a sector experiencing the fastest interest rate rise cycle in four decades, and the longest inversion of the government bond yield curve in modern times – i.e. short-term government bonds yield higher yields than government bonds. will mature in 10 or 30 years.
While there is no denying that aggressive monetary policy, which has rapidly raised short-term interest rates, is negatively impacting Annaly’s net interest margin and the book value of its assets, it can be argued that the tide is turning in its favor.
For starters, we’ve reached a point where the Federal Reserve is starting to move slowly. Even in an environment of rising interest rates, Annaly can be successful. It simply needs telegraphed moves from the Fed to position its asset portfolio for success. If the Fed holds on to its interest rates, or better yet, initiates a slow rate easing cycle, Annaly could enjoy a modest expansion of its net interest margin.
To further reinforce this point, the Treasury yield curve has historically spent most of its time sloping up and to the right. This means that bonds with a longer term have delivered higher returns than government bonds with a shorter term. 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 could benefit.
If there is a bright side to the central bank’s aggressive monetary policy, it is that it has stopped buying mortgage-backed securities (MBS). With the Fed out of the picture as a buyer, Annaly and her peers have found a clearer path to buying what are now higher-yielding MBSs.
Another reason income seekers can confidently turn to Annaly Capital Management is the composition of its $73.5 billion investment portfolio. The company ended March with $64.7 billion in liquid agency assets. Agency securities are backed by the federal government in the event of default. While this additional protection reduces the returns Annaly receives compared to non-agency assets, it also allows the company to safely leverage its portfolio to maximize its profits. This way it can maintain double-digit returns.
With multiple variables pointing to long-term net interest margin and book value appreciation, Annaly Capital Management seems like the perfect bad news buy for dividend investors this June.
Time to Strike: Walgreens Boots Alliance (6.17% return)
The second defeated ultra-high yield dividend stock begging to be bought by opportunistic income seekers in June is none other than a pharmacy chain Walgreens Boots Alliance (NASDAQ: WBA). Walgreens shares have returned 83% since hitting an all-time high in 2015, with the company’s yield recently rising above 6%.
While not an exhaustive list, Walgreens has faced a plethora of headwinds, including:
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Increasing competition from online pharmacies.
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Litigation over its role in the opioid crisis.
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Increased shrinkage (theft) in some major cities where the company operates.
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A high level of debt, which is not ideal in an environment of rising interest rates.
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The dividend almost halved in January to increase cash flow.
While stories of a retail turnaround don’t happen overnight, Walgreens has the leadership and necessary tools to deliver results for its patient shareholders.
As I’ve mentioned in the past, the single most important change Walgreens recently made was replacing Rosalind Brewer with Tim Wentworth as its new CEO.
Unlike Brewer, who had a retail background, Wentworth has decades of experience in the healthcare industry. Notably, he was previously the CEO of Express Scripts, the largest pharmacy benefit management company in the country, as well as the founder and CEO of Evernorth, Cigna‘s healthcare organization. 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 the levers it can use to reduce its expenses and positively impact margins as it navigates its way through near-term challenges. In addition to returning the dividend to a sustainable level, the company is targeting total annual cost savings of $4.1 billion.
Furthermore, the company has sold non-core assets and investment positions, presumably with the intention of reducing its outstanding debt and increasing its financial flexibility. Selling the Boots division in Britain could also be on the table as a tactic to reduce debt.
Although it has been a bumpy transition, Walgreens Boots Alliance has turned its attention to healthcare services. Despite a recent write-down of its investment in VillageMD, management remains focused on offering full-service health clinics in its stores. Providing differentiation with these full-service clinics while keeping costs under control could deliver profitable healthcare outcomes as early as next year.
Don’t forget about the company’s digitalization efforts. While cutting costs is an important strategy, management hasn’t been afraid to spend money on technology in an effort to revamp the company’s supply chain, or build out its direct-to-consumer website to boost organic sales.
And last but not least: the valuation has never been so convincing. A price-to-earnings (P/E) ratio of 5, coupled with Walgreens Boots Alliance trading at book value, represents an incredible deal for income seekers willing to be patient.
Should You Invest $1,000 in Annaly Capital Management 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 stocks mentioned. The Motley Fool has a disclosure policy.
Time to Pounce: 2 Beat Ultra-High-Yield Dividend Stocks That Are Begging to Be Buy in June was originally published by The Motley Fool
