According to research from Hartford Funds, over the long haul, dividends have generally provided around 40% of the market's total returns. While that's a substantial number on its own, where dividends can really add value to your portfolio is if you let them compound within your investments to really build your wealth.
Say you're investing $500 per month, and the total return you expect is around 10% annualized. If 60% of that comes from growth and 40% of it comes from dividends, then there's a huge difference in what you end up with over time depending on whether you spend or reinvest those dividends.
Using that split and that expected return, over 20 years, that $500 per month could turn into about $231,000 if you spend your dividends or a bit over $379,000 if you reinvest them. That's an impressive gap, driven simply by letting your dividends provide compounding for you.
More dividends = more compounding, right?
So if reinvesting a modest dividend can drive that much difference in your returns, then seeking out and reinvesting an ultra-high-yield dividend must make things even better, right? Well, it's not quite that easy. A very high yield is often a sign of a dividend in distress and about to get cut, and a cut dividend does you no good when it comes to compounding.
If you're interested in maximizing your compounding with ultra-high-yield stocks, the first thing you need to do is figure out why you think those dividends can be sustained. If you don't have a clear reason to believe that, then you're probably better off avoiding the shares, no matter how tempting the dividend might seem. With that in mind, these three ultra-high-yield dividend stocks can potentially bring some major compounding to your portfolio.
1. A major energy infrastructure player
Enbridge (NYSE: ENB) is the largest energy pipeline company in North America. It ships oil and natural gas around the continent, getting paid based largely on the volume of the energy it transports rather than the price of that energy. Although there's a push toward greener energy, the U.S. Energy Information Administration projects strong oil and natural gas demand for decades to come. That bodes well for Enbridge's ability to continue to deliver dividends to its shareholders for a long time to come.
Enbridge currently offers investors a yield of around 6.1%, and if held in an IRA, it won't be subject to the Canadian withholding taxes that American investors would otherwise face. Enbridge has increased its dividend for 27 consecutive years, and the structure of its business provides good reason to believe that it can continue the trend.
2. A hard-money lender with a very strong balance sheet
Broadmark Realty Capital (NYSE: BRMK) is a real estate investment trust (REIT) that is in the business of hard-money lending: essentially financing real estate projects that can't quickly be funded by more-traditional loans. In today's era of rising interest rates, its services are likely to be in high demand.
Many lenders are trapped by their own high debt loads, and those debt loads require them to be more cautious and slow when they make their lending decisions. By contrast, Broadmark has a very solid balance sheet, with a debt-to-equity ratio below 0.1 and over $35 million in cash available to it. Add to that a completely untapped $135 million line of credit, and Broadmark has great access to its own cash and ready access to additional cash if needed. In a world of rising rates, that's a great place to be.
Broadmark pays its shareholders a monthly dividend, which right now clocks in at a whopping 12.4% annual yield. High lending standards mean it's not growing all that fast at the moment, but it's precisely those high standards that provide reason to believe it has a chance of maintaining that dividend.
3. A telecom titan at the forefront of 5G
Verizon Communications (NYSE: VZ) claims to have the fastest 5G cellular telephone service in the world when consumers can access their millimeter wave network. That speed gives it a great marketing point in order to attract and retain customers to its network.
The beauty of cellular service is that it's a subscription model that people are very willing to pay monthly for long time periods. Verizon often makes that subscription even stickier by offering its customers “free” upgrades on their phones — as long as they remain subscribers to their network. Sticky revenue translates to fairly predictable earnings, and thus the ability to continue to support its dividend over time.
Speaking of that dividend, it currently offers its investors a juicy 5.6% yield, and that dividend only consumes just over half of the company's earnings. That solid dividend coverage also bodes well for Verizon's ability to continue to pay that dividend.
A juicy dividend can go a long way
If you're looking for compounding returns, reinvesting generous dividends can provide a substantial boost to your portfolio. Just be sure that the companies you're buying look like they can maintain — and ideally, boost — their dividends over time, and those seemingly small payments can certainly add up over time.
The thing about compounding, though, is that the longer you give it to work its magic, the bigger the potential benefits you get. So make today the day you start getting the foundation in place for some major compounding.
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Chuck Saletta has positions in Broadmark Realty Capital Inc. and Enbridge and has the following options: long January 2024 $40 calls on Enbridge, short January 2023 $47.50 calls on Enbridge, short January 2024 $35 puts on Enbridge, and short January 2024 $40 puts on Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.