Want $10,000 in Annual Dividend Income? Invest $114,000 in This

Since the end of the Great Recession in 2009, growth stocks have rightly been the talk of Wall Street. Historically low lending rates have paved the way for fast-growing companies to borrow at cheap rates in order to hire, innovate, and acquire other businesses.

But truth be told, dividend stocks have been the place to be over the long run.

A 2013 report from J.P. Morgan Asset Management showed that companies initiating and growing their payouts between 1972 and 2012 averaged an annual return of 9.5%. Comparatively, companies that didn’t offer a payout only gained an annual average of 1.6% over the same time frame.

While it’s clear that profitable, time-tested companies paying a dividend have delivered superior long-term returns, the question remains: Which dividend stocks to buy? Ideally, income seekers want the highest yield possible with the least amount of risk. However, once you reach the high-yield mark (a payout of 4% or higher), risk and yield tend to be correlated. This means high-yield stocks can often be more trouble than they’re worth.

But this doesn’t mean all high-yield dividend stocks are off limits. There’s a trio of ultra-high-yield stocks (what I’d arbitrarily define as a 7% or higher yield) that investors can buy right now that would lead to some serious income potential. If you were to invest $114,000 and divide it equally into these three stocks, you’d be set to receive $10,000 in annual dividend income, representing an average yield of 8.79%, based on closing prices for Sept. 28.

Annaly Capital Management: 9.99% yield

The ultra-high-yield stock I have the utmost confidence will deliver for conservative, long-term, income-seeking investors is mortgage real estate investment trust (REIT) Annaly Capital Management (NYSE:NLY). Annaly is effectively yielding 10%, and has averaged a roughly 10% payout for the past two decades. In other words, this isn’t a flash-in-the-pan high-yield. Since it was founded in 1997, Annaly’s payout has consistently been many multiples higher than the benchmark S&P 500.

The mortgage REIT operating model is pretty straightforward. Companies like Annaly are looking to borrow money at lower short-term lending rates and use their capital to purchase higher-yielding long-term assets, such as residential mortgage-backed securities (RMBS). The goal is to widen the company’s net interest margin — the difference in average yield received from RMBSs minus the average borrow rate — as much as possible. As I said, it’s a pretty cut-and-dried business model.

What really matters for Annaly Capital Management is interest rates, and in this respect, everything looks to be working in its favor. Annaly usually performs poorly when the yield curve is flattening (i.e., the difference between long-term and short-term Treasury yields shrinks) and/or the Federal Reserve is undertaking big changes to its federal funds…