Stock market volatility is not something the average investor looks forward to. However, that’s not the case for Robinhood investors.
Last year, an estimated 3 million new users flocked to the Robinhood platform amid record volatility in the market. That’s noteworthy because the average age of Robinhood’s user base is only 31. These are millennial and/or novice investors that are, in many instances, looking to get rich quick by making very short-term trades or riding momentum stocks.
But contained within Robinhood’s leaderboard — the 100 most-held stocks on the platform — are three high-yield dividend stocks that its investors absolutely love.
Whereas a high-yield dividend describes a company yielding 4% or more annually, an ultra-high-yield dividend stock is a company that I’m arbitrarily defining as having the potential to double your initial investment through dividend reinvestment in a decade or less. Two of the following three popular income stocks on Robinhood offer to do that, based on their current yields.
AT&T: 7.2% dividend yield
First up is telecom giant AT&T (NYSE:T), which as of Feb. 19 slotted in as the 43rd most-held stock on Robinhood. At its current yield of 7.2%, investors could double their money with dividend reinvestment (assuming AT&T’s share price remained static) in 10 years.
Admittedly, AT&T doesn’t fit the mold of what millennial investors are often after in a stock. Its growth has slowed notably over the years, with cord-cutting at satellite TV operator DirecTV capping its potential. It’s also lugging around a burdensome $179 billion in debt.
However, buying into the cash flow predictability offered by AT&T might be a smart move by young investors. Even though AT&T’s growth heyday is a distant memory, it does have three potential catalysts that can increase shareholder value over time.
For starters, it’s set to benefit from the multiyear infrastructure upgrades to 5G. It’s been a decade since the last major upgrade to wireless download speeds, which makes it highly likely that we’ll see consumers and businesses jump at the opportunity to upgrade their devices. Since AT&T’s wireless division is driven by data, increased data consumption can only be a long-term positive for the company.
Secondly, streaming service HBO Max is finding its stride after a slow start. Despite debuting in late May, it wasn’t until midway through the fourth quarter that subscriber numbers began to rocket higher. AT&T subsidiary WarnerMedia is also releasing all of its new movies in 2021 on HBO Max the same day they’ll hit theaters. That’s an added dangling carrot bound to boost subscriptions.
Third, AT&T is working diligently to sell non-core assets, and perhaps even DirecTV, to reduce its debt. While its 7.2% payout remains secure, working toward improved financial flexibility should help expand AT&T’s minuscule forward earnings multiple of 9.
Invesco Mortgage Capital: 8.6% dividend yield
Another ultra-high-yield dividend stock that Robinhood investors fancy is mortgage real estate investment trust (REIT) Invesco Mortgage Capital (NYSE:IVR). Invesco holds the No. 89 spot on Robinhood’s leaderboard.
Of the three income stocks listed here, Invesco is certainly the riskiest of the bunch. Last year, Invesco was invested primarily in commercial mortgage-backed securities and other credit risk transfer securities that aren’t backed by any federal agencies in the event of default. When the coronavirus crash hit, Invesco simply didn’t have the capital needed to meet its margin calls, which put the company (temporarily) into forbearance. It’s now out of forbearance, and its future is, once again, looking bright.
A mortgage REIT like Invesco Mortgage Capital is constantly looking to use yield to its advantage. Mortgage REITs are companies that borrow at lower short-term borrowing rates and buy assets that offer higher long-term yields. The difference between this long-term yield received from assets owned minus the borrowing rate is known as net interest margin (NIM). During the early stages of an economic recovery, it’s not uncommon for the yield curve to steepen, which for mortgage REITs results in a healthy expansion of their NIM.
What’s more, Invesco’s brush with forbearance has coerced management into a new game plan. Instead of buy non-agency assets, it’s focused on filling up its portfolio with mortgage-backed securities protected in the event of a default by a federal agency (known as agency securities). Although agency assets boast lower yields, they’re much safer and allow for leverage to be used by Invesco to boost profits.
Even with a reduced payout, Invesco Mortgage Capital is still outlaying an 8.6% annual yield to patient shareholders.
ExxonMobil: 6.6% dividend yield
The third high-yield dividend stock Robinhood investors love is integrated oil and gas giant ExxonMobil (NYSE:XOM). Currently the 74th most-held stock on the platform, ExxonMobil proves that young investors do buy non-penny stocks in the energy space.
Similar to the other high-yield stocks, the going hasn’t been easy for ExxonMobil of late. Demand for crude oil fell off a cliff in 2020 as developed countries around the globe went in lockdown to slow the spread of the coronavirus disease 2019 (COVID-19). However, things are beginning to look up as the economic recovery takes shape.
One core advantage for ExxonMobil is its integrated operating model. Energy companies focused solely on the upstream (i.e. drilling) side of the business have been clobbered by COVID-19. Even though upstream is where ExxonMobil generates its juiciest profits, it can lean on its downstream refining and chemical operations as a hedge when crude prices fall. After all, lower input costs should lead to improved cash flow for its downstream operations.
The company also has significant levers it can pull to improve its cash flow in a challenging environment for crude oil. Last year, it quickly adapted to COVID-19 by lopping more than $10 billion off of its planned capital expenditures (originally as high as $33 billion). In 2021, ExxonMobil plans to spend between $16 billion and $19 billion on CapEx. Yet, even with these capital reductions, a handful of major projects remain on track.
Buyers of ExxonMobil will enjoy a gusher of a dividend that’s yielding 6.6% at the moment. Reinvesting this payout can double your money in about 11 years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/02/22/3-high-yield-dividend-stocks-robinhood-investors/