3 ultra-high dividend stocks to buy Hand Over Fist in December

There is no shortage of ways to make money on Wall Street. Investing in growth stocks has been a lucrative strategy for the past 12 years. Historically low lending rates and an accommodating Federal Reserve have allowed fast-paced businesses to thrive.

But in the very long term, few investment strategies have been more lucrative than buying dividend-paying stocks.

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Dividend-paying stocks have significantly outperformed non-dividend payers

In 2013, JP Morgan Asset Management, a division of JPMorgan Chase, published a report comparing the performance of listed companies that initiated and paid a dividend between 1972 and 2012 to stocks that did not pay a dividend during the same period. The result? Dividend-paying companies have generated an average annual return of 9.5% over four decades, which compares quite favorably to the meager 1.6% annualized return of non-dividend-paying stocks.

These results are not that surprising. Companies that pay a dividend are almost always profitable on a recurring and proven basis. They also usually have a clear long-term outlook and expect growth to continue.

The biggest challenge for income investors is balancing return and risk. Ideally, income seekers want the highest possible return with the least amount of risk. Unfortunately, studies have shown that risk tends to correlate with return once you hit high return territory (around 4%). Since return is a function of payout over price, a company with a failing business model and plummeting stock price can offer a high, but potentially unsustainable return.

But there is good news for income investors. There are three ultra-high dividend stocks – I arbitrarily define this as a yield of 8% or more – ripe for selection that investors can buy hand-in-hand in December.

A family of four sitting on a sofa, each connected to a wireless device.

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AT&T: 9% yield

The first ultra-high-yielding income stock asking to be bought in December is the telecommunications giant AT&T (T 1.78% ). AT&T is offering an overwhelming 9% market return (which I’ll have more to say in a moment) and its stock price recently hit its lowest level in over a decade. This makes it ripe for picking in more ways than one.

The clear and obvious catalyst for AT&T has always been the deployment of 5G infrastructure. It’s been a good decade since consumers and businesses were offered significant improvements in wireless download speeds. While AT&T is spending a lot of money on 5G infrastructure upgrades, it will be worth it in the long run. We should expect 5G to encourage a multi-year device replacement cycle that results in steadily increasing data consumption. Since data is what drives the wireless segment of the business, 5G represents a healthy dose of sustainable organic growth for AT&T.

The other major growth driver for AT&T is the impending spin-off of the WarnerMedia company. AT&T plans to merge WarnerMedia with Discovery (DISCA)(DISC 2.34% ) to create a new multimedia entity that will have more than 85 million pro forma streaming subscribers and offer an even larger library of original content and sports programs. It also doesn’t hurt that the combination of these media behemoths will ultimately result in more than $ 3 billion in annual savings.

Discovery CEO David Zaslav, who will lead the new company, WarnerMedia-Discovery, believes it could eventually reach 400 million streaming subscribers worldwide.

In addition, the jettisoning of WarnerMedia will allow AT & T’s remaining businesses to reduce costs and focus on debt reduction. This will result in a reduction in its dividend, probably around 5%. This is still well above the average return of the S&P 500 and the historical inflation rate.

At less than 8 times annual profit, it’s probably as cheap as you’ll ever see AT&T.

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AGNC Investment Corp. : yield of 9.3%

Another mortgage real estate investment trust (REIT) is another super high yield dividend stock income trust that investors can buy in December. AGNC Investment Corp. (AGNC -0.84% ). AGNC currently has a 9.3% return and has averaged a double-digit percentage return over 11 of the past 12 years.

While the mortgage REIT industry may seem complicated, it is actually quite easy to understand. Companies like AGNC borrow money at lower short-term borrowing rates and use that capital to buy assets with higher long-term returns. These assets are almost always Mortgage Backed Securities (MBS). The goal of mortgage REITs is to maximize the difference between the yield on the MBS and its borrowing rate (this is called the net interest margin). It really is that simple.

One of the factors that makes AGNC so attractive is the predictability of the mortgage REIT industry. Typically, mortgage REITs perform poorly when the interest rate curve flattens (i.e. the spread between short-term and long-term Treasury bond yields narrows) or if the Federal Reserve is rapidly changing its monetary policy. Conversely, steepening in the interest rate curve and slow, orderly changes in monetary policy tend to be favorable. Considering the multiple economic recoveries after a recession, the latter scenario dominates. In other words, we are in that part of the cycle where AGNC’s net interest margin is increasing.

Another thing investors should appreciate about AGNC Investment is the emphasis on agency securities. An agency asset is an asset backed by the federal government in the event of default. Only $ 2.1 billion of its $ 84.1 billion investment portfolio is made up of non-agency assets. While this added protection of owning agency titles reduces the return it receives on the MBS it purchases, it also allows the company to use leverage to increase profits.

With AGNC analyzing a monthly dividend and trading at 12% below book value, it has everything it needs for a garish buy.

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Enterprise Product Partners: 8.4% return

The third ultra-high-yielding dividend stock that investors can buy in December is the oil stock Enterprise Product Partners (DEP -0.47% ). This master limited partnership pays a hefty 8.4% return and overcomes a 23-year streak of increasing its annual base payout.

Some of you are probably put off by buying anything that has to do with the petroleum or natural gas industry given what happened last year. The coronavirus pandemic has caused a historic drop in demand for crude oil and briefly pushed oil futures into negative price territory.

However, Enterprise Products Partners was hardly affected. This is because it is an intermediate operator of oil, natural gas and natural gas liquids. Instead of being tied to wild fluctuations in fossil fuel prices, intermediary operators are middlemen who manage the transportation, storage and occasional processing of fossil fuels. In the case of this company, it owns approximately 50,000 miles of pipelines, 19 natural gas processing facilities and 14 billion cubic feet of natural gas storage capacity.

The secret sauce for Enterprise Products Partners is its contracts. They are designed in such a way that transmission, storage and processing volumes are known in advance, which leads to highly predictable cash flows. Being able to develop accurate annual outlooks is imperative for disbursing capital for new infrastructure projects and maintaining the top dividend of the business.

Speaking of which, at no time during the height of the COVID-19 pandemic has this company’s distribution coverage ratio – a measure of annual distributable cash flow relative to what is actually distributed to shareholders – didn’t fell below 1.6. Anything less than 1 would represent an unsustainable payout. This demonstrates that Enterprise Products’ payment is extremely secure, even at an 8.4% return.

With a multiple of 10 times annual profits, Enterprise Products Partners is downright cheap.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Kristopher Harris

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