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Willing to Take on More Risk? These Big-Time Dividend Stocks Could Turn $7,500 Into More Than $1,000 of Annual Income.

In Business
March 03, 2024

High-yield dividend stocks are typically riskier than their lower-yielding peers. The underlying companies usually have high dividend payout ratios, which doesn’t leave much room for error. If something goes wrong, they might need to cut their dividends.

But if things go right, they can be very rewarding by supplying investors with lots of income. For example, a $7,500 investment spread across three high-yield dividend stocks could provide investors with more than $1,000 of annual passive income:

Dividend Stock

Investment

Current Yield

Annual Dividend Income

AGNC Investment (NASDAQ: AGNC)

$2,500

15.07%

$376.75

NextEra Energy Partners (NYSE: NEP)

$2,500

12.62%

$315.50

Brandywine Realty Trust (NYSE: BDN)

$2,500

13.66%

$341.50

Total

$7,500

13.78%

$1,033.75

Data source: Google Finance.

Here’s a closer look at what’s driving those big-time dividends and the factors to watch that could put them at risk of a reduction.

Earning enough to maintain the dividend (for now)

AGNC Investment is a mortgage real estate investment trust (REIT) that invests in mortgage-backed securities (MBS) protected against credit losses by government agencies like Fannie Mae. Agency-backed MBS are very low-risk fixed-income investments. They’re also fairly low-return investments.

Residential mortgage REITs like AGNC juice those returns by using leverage. But that also increases risk. For example, amid rising interest rates, borrowing costs rise, which squeezes profit margins.

These and other risks have caused the REIT to cut its monthly dividend a few times in the past. The company noted that one of the crucial factors supporting its dividend is its ability to earn a high enough return on equity to cover its expenses and payout. Right now, its dividend is in alignment with its returns. However, if market conditions or other factors deteriorate, the REIT might need to cut its payout again.

This reset plan could give it the power to continue increasing the payout

NextEra Energy Partners owns a growing portfolio of clean-energy infrastructure, like wind farms and solar projects, as well as natural gas pipelines. Those assets generate very stable income, nearly all of which it pays to investors in dividends.

The company finances its business with debt and a funding vehicle called convertible equity portfolio financing (CEPF). Rising interest rates have made it challenging to refinance maturing debt and complete the required repurchases of CEPF as they come due. These issues forced the company to make some changes, including selling off its gas pipeline assets to repay maturing CEPF and slowing its dividend growth forecast.

NextEra Energy now expects to increase its dividend by 5% to 8% annually through 2026 with a target of 6% (down from 12% to 15% per year). It expects to deliver that growth by investing in high-return projects to repower existing wind farms.

However, its plan would see its payout ratio be in the mid-90s, which is very high. If the company can’t execute on its strategy, it might need to pause dividend growth or cut its payout.

A towering yield

Brandywine Realty Trust owns office and mixed-use properties in Philadelphia and Austin, Texas. The REIT generates fairly stable rental income, the bulk of which it uses to pay dividends.

Like other office REITs, Brandywine has been facing headwinds from waning demand due to remote and hybrid work. That has weighed on occupancy levels, rental rates, and its income. Those issues already forced the REIT to cut its dividend last fall.

Even at that reset level, Brandywine has a high dividend payout ratio (90% to 95% of its cash available for dividends in 2024). Because of that, it doesn’t have a lot of room for error or financial flexibility.

But the company has lots of liquidity and only one bond maturity through 2027. Meanwhile, it has been working to sell noncore assets, giving it cash to bolster its balance sheet and fund development projects.

If the company can execute on its strategy, and market conditions don’t deteriorate further, it could continue paying dividends at its reset level.

High-risk, high-reward dividend stocks

AGNC Investments, NextEra Energy Partners, and Brandywine Realty Trust currently offer dividend yields in the double digits. Because of that, they could turn a $7,500 investment into more than $1,000 of annual income if they can maintain their payouts. While they currently expect to do that, risks of dividend cuts remain high. That’s why investors need a high risk tolerance before adding these big-time income stocks to their portfolios.

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Matt DiLallo has positions in NextEra Energy Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Willing to Take on More Risk? These Big-Time Dividend Stocks Could Turn $7,500 Into More Than $1,000 of Annual Income. was originally published by The Motley Fool

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