Dividends are certainly an important piece of many investors' net results. They're not the only reason people may own a particular stock, however. Capital appreciation matters, too. After all, you'll need net gains as well if you're hoping to invest your way to a seven-figure nest egg.
There are some high-yield stocks, however, with big enough dividends to drive most -- if not all -- of the growth needed to turn a little money now into a million bucks later. Here's a look at three of them that could help you retire a millionaire.
1. AGNC Investment
OK, it's not a stock... at least not in the traditional sense. AGNC Investment(NASDAQ: AGNC) is a real estate investment trust, or REIT.
Even by REIT standards, though, this organization is a bit unusual. Rather than holding a portfolio of income-producing real estate, AGNC investment holds bundles of mortgage loans made by government-run agencies like Fannie Mae, Freddie Mac, and Ginnie Mae. Its strategy is simply purchasing higher-yielding mortgage-backed securities using money borrowed at a lower interest rate; the REIT's profitability lies in the difference between these rates.
It can be a tricky business, to be sure. In a normal economic environment, AGNC's shorter-term borrowing costs are less than the returns it achieves on the long-term mortgage loans it's holding. When short-term interest rates push above longer-term rates, however, the business model unravels. That's why shares of this real estate investment trust have struggled since the middle of 2021, when inflation first started to rise, setting the stage for an eventual spate of short-term rate hikes.
With the domestic and global economy easing its way back to normalcy on the improving prospect of a so-called "soft landing," though, the backdrop that's proven so problematic for mortgage REITs is taking a turn for the better as well.
Although mortgage rates will likely decline and demand for mortgage loans could remain subdued, forecasters with Bank of America, DoubleLine, and Capital Economics all suggest the yield curve will revert back to normal in the coming year. That means long-term interest rates will be back above short-term rates soon enough. In the meantime, Goldman Sachs doubts the recent inversion of the yield curve ever actually signaled the recession they're typically presumed to predict.
All of this, of course, works in AGNC Investment's favor.
This real estate investment trust's current dividend yield stands at just under 15%. Once the economic backdrop starts looking healthier, though, don't be surprised to see that yield contract at the REIT's price gains outpace any dividend growth in the cards.
2. Petrobras
It's a tricky time to invest in oil stocks. Oil prices have been falling from their mid-2022 peak, sliding to within striking distance of a new 52-week low just last week. The recent attack on oil tankers in the Red Sea only adds to supply (and therefore price) uncertainty. Investors have a great number of things to consider here.
If you can stomach the volatility though, Brazilian oil giant Petróleo Brasileiro(NYSE: PBR) (you might know it better as Petrobras) is a juicy prospect. Its trailing twelve-month dividend yield stands at nearly 20%, while its forward-looking dividend yield is in the same ballpark.
This sizable yield comes with a major footnote. That is, the underlying payments are anything but consistent. Annualizing its most recently declared quarterly payment of just under $0.24 per share, for instance, pulls the yield down to a much less impressive 7%. Its payouts are always in flux, changing in step with its profits. Indeed, the company's stated policy is paying out at least 45% of its free cash flow in the form of dividends, but cash flow is largely a function of ever-changing oil prices. Intermittent "special" dividends dished out when earnings are unusually strong only add to this stock's payment unpredictability... even if they bolster shareholders' total returns.
PBR Dividend data by YCharts.
Bottom line? If you need consistent dividend income to pay your bills or to fund a dollar-cost-averaging plan, forget about this ticker. If you're a long-term oil bull looking for a way to cash in on crude's price growth, however -- and if its inconsistent payouts don't matter -- Petrobras is clearly attractive. A big piece of whatever profits it's producing are passed along to shareholders in cash. Yet, this paradigm never seems to leave this state-supported oil company without enough capital to fully fund new projects.
3. Ares Capital
Last but not least, add Ares Capital(NASDAQ: ARCC) to your list of high-yield dividend stocks that could help you become a millionaire. Newcomers will be stepping in while the yield stands at nearly 10%.
Like AGNC Investment, Ares Capital isn't a conventional stock. It's in a category of investments called business development companies, or BDCs. As the name suggests, these outfits help up-and-coming companies become all they can be. This support usually comes in the form of a loan, although it's not unheard of for BDCs to provide capital in exchange for equity. This is funding that most conventional banks wouldn't usually offer due to its above-average risk, which is why the business is also sometimes referred to as private credit. This higher risk, in turn, means these loans are made at above-average interest rates. That's how Ares can afford its big dividend.
And Ares is very, very good at what it does.
It has found its sweet spot within the private credit market, working predominantly with mid-sized companies. Most of the 490 companies currently on its customer list operate in more defensive industries like software, healthcare, and commercial services. Roughly three-fourths of its borrowers are considered to be relatively low-risk customers. To this end, since 2004, Ares Capital hasn't booked any net investment losses, outperforming banks and rival business development companies on this important metric.
Obviously, past performance is no guarantee of future results. However, after 14 straight years of steady or increased annualized dividend payments (from 2009's $0.37 per share to this year's $1.85), it's tough to say that Ares hasn't figured out and even perfected a winning formula.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Goldman Sachs Group. The Motley Fool has a disclosure policy.
