Over the last century, the stock market has stood on a pedestal above all other asset classes, as while investing in Treasury bonds, housing, and commodities like gold, and oil can increase your nominal wealth, none of these other asset classes has come anywhere close to the average annual returns that stocks have delivered over the very long term. 

What makes Wall Street so special is its diversity of investments, and with thousands of publicly traded companies and exchange-traded funds to choose from, there is a really good chance there is an investment vehicle (or 10) to satisfy everyone’s goals and level of risk tolerance. 

And among these countless investment opportunities, few strategies have been more consistently successful than buying and holding dividend stocks over extended timelines. 

Last year it was revealed that over a span of 50 years (1973 – 2023), the average yearly returns of companies that consistently pay dividends to their shareholders had much higher returns than companies that do not pay dividends. 9.17% versus 4.27%. In addition, dividend stocks were 6% less volatile than the benchmark S&P 500, while the non-payers were, on average, 18% more volatile.

Now, to understand why dividend stocks have outperformed, we have to look at a couple of factors:

First, companies that consistently pay dividends tend to be well-established with stable earnings and cash flows. These companies often operate in mature industries where they can generate substantial profits and return a portion of these profits to shareholders in the form of dividends. This stability can provide a cushion during economic downturns, making dividend-paying stocks less volatile than non-payers.

Additionally, dividend payments can be reinvested to purchase more shares, compounding returns over time, and this reinvestment can significantly enhance the total return on investment, especially over long periods. 

It is worth highlighting that dividend reinvestment can be a powerful tool for wealth accumulation, as it allows investors to take advantage of compounding interest, often referred to as the “eighth wonder of the world”.

However, while dividend stocks have a lengthy track record of outperformance, no two income stocks are created equally. In some situations, a plunging share price can pump up a company’s yield and lure income seekers into a trap. Thus, you should keep in mind that although a high dividend yield might appear attractive, but it can be a red flag if it results from a declining share price due to underlying business issues.

Therefore, it is crucial to assess the sustainability of a company’s dividend payments by considering different factors such as the company’s payout ratio (the percentage of earnings paid out as dividends), the stability of its earnings and cash flows, and the health of its balance sheet.

Be aware that that companies with high payout ratios, inconsistent earnings, or significant debt levels may struggle to maintain their dividend payments during economic downturns.

Nonetheless, despite the risks dividend stock investments can still be a good strategy to build long-term wealth, and currently, there is one high-yield dividend stocks seems to be pointing to long-term net interest margin and book value expansion.

This high-yield dividend stock is Annaly Capital Management (NLY):

Annaly is a mortgage real estate investment trust (REIT) heavily influenced by interest rates and monetary policy. It has returned $25 billion to its shareholders since its initial public offering in October 1997, and it offers jaw-dropping yield of 13.2%.

Nonetheless, it is important to remark that this company, which is considered as an major player in the REIT industry, has been facing notable challenges due to its sensitivity to changes in interest rates and monetary policy.

Since March 2022, the REIT industry has dealt with the fastest rate-hiking cycle in four decades and the longest Treasury yield-curve inversion of the modern era. And this has made it challenging for Annaly to maintain its net interest margin and book value. In fact, Annaly’s shares are down 58% over the last decade.

However, despite the challenges, there are signs that the tide might be turning in Annaly’s favor.

Let’s remember that the Federal Reserve has been considering to ease their approach of higher interest rates. Thus, if the Fed remains with the holding pattern we have been witnessing in their last meetings, or eventually begins to lower rates, Annaly’s net interest margin can end up being stabilized, and we could see a modest expansion of its net interest margin.

Also, since the Fed has stopped purchasing mortgage-backed securities (MBS), it has allowed Annaly to acquire higher-yielding MBS, and this can enhance the company’s income-generating potential.

And lastly but not least, Annaly’s $73.5 billion investment portfolio includes $64.7 billion in liquid agency assets. These “agency” securities are backed by the federal government in the event of default, which provides added security and allows Annaly to leverage its portfolio for higher returns.

Ultimately, as mentioned previously, investing in dividend stocks can be a powerful strategy for long-term wealth accumulation. However, keep in mind that they do come with risks, especially high-yield stocks, which can face notable losses if their underlying businesses are struggling. But if you do not mind the big risk, you could consider Annaly’s beaten-down high-yield dividend stock, which could offer attractive returns if things turn favorable for the company.