A dollar simply doesn't go as far as it used to. Last week, the U.S. Bureau of Labor Statistics announced that inflation had risen 7.5% from the prior-year period (as of January 2022), marking the heftiest increase for the price of a predetermined basket of goods and services since 1982!
While high inflation typically forces consumers to open their wallets a bit wider, it doesn't have to impact their portfolios. Relying on profitable, time-tested dividend stocks can often be a smart hedge against rapidly rising prices.
Although ultra-high-yield dividend stocks (those I'm arbitrarily defining as having yields of 7% or above) require a lot of extra vetting to avoid buying a yield trap, the following five ultra-high-yield income stocks have all the tools necessary to help you crush inflation.
AGNC Investment Corp.: 10.25% yield
If inflation-crushing income is what you're after, the mortgage real estate investment trust (REIT) industry is the place to look. Within the mortgage REIT space, few companies have delivered a more consistent yield than AGNC Investment Corp. (AGNC 0.31%). AGNC has averaged a double-digit yield in 12 of the past 13 years.
Mortgage REITs like AGNC seek to borrow capital at low short-term rates, which they use to purchase higher-yielding long-term assets, such as mortgage-backed securities. As you might imagine, this operating model tends to be interest rate sensitive. While a rising-rate environment does increase short-term borrowing costs, and it can negatively impact book value in the very short term, it's a long-term positive because it increases the yield AGNC receives on the MBSs it purchases. As long as the Fed continues to telegraph its monetary policy moves well in advance, AGNC will be in position to thrive.
Additionally, agency assets make up $79.7 billion of AGNC's $82 billion investment portfolio. An agency security is backed in the event of default by the federal government. Though this protection does reduce the yield AGNC receives on the MBSs it buys, it also allows the company to use leverage to its advantage.
Antero Midstream: 8.81% yield
Some income investors might be a bit leery of trusting oil stocks after witnessing a historic crude oil demand drawdown during the initial stages of the coronavirus pandemic in 2020. However, many of these concerns didn't faze midstream operators like Antero Midstream (AM 2.67%).
Whereas upstream companies that retrieve oil and natural gas out of the ground are directly impacted by the ebbs and flows of commodity prices, midstream companies are not. Antero Midstream operates 468 miles of transmission pipeline and has 3.2 billion cubic feet of natural gas compression capacity. It's a middleman in the energy complex that benefits from fixed-fee contracts. In other words, Antero Midstream's management team is working with a transparent cash flow outlook, which helps the company undertake projects without compromising its payout or profitability.
Keeping this in mind, you're probably wondering why Antero Midstream cut its distribution by 27% in 2021. The answer is simple: expansion opportunities. Parent company Antero Resources is increasing its natural gas drilling activity on Antero Midstream's acreage. This means more opportunity to build midstream infrastructure to take advantage of this added production. Even with this payout reduction, Antero Midstream is still doling out an inflation-topping 8.8% yield.
Alliance Resource Partners: 7.35% yield
Another ultra-high-yield dividend stock that can help you run circles around inflation is coal producer and oil and gas royalty company Alliance Resource Partners (ARLP 0.61%). And no, you're not dreaming. I did say "coal producer."
Similar to oil stocks, coal producers were pummeled in 2020 as demand and pricing for coal plunged. Alliance Resource Partners even had to halt its once-impressive streak of hefty quarterly distributions.
But with natural gas prices soaring, coal demand and pricing have been steadily climbing for multiple quarters. Alliance Resource Partners has been increasing its output and netting a higher price per ton on what it's selling. Best of all, management has a long history of locking in price and volume commitments months or years in advance. As of late January, 89% of expected output was already locked in for 2022, with 16.4 million domestic tons committed for 2023 (about 46% of expected annual output, based on 2022's production forecast). The resulting cash flow transparency is what makes this company such a gem for income investors.
With oil and natural gas hitting multiyear highs, Alliance Resource Partners' royalty segment will receive a boost, too.
PennantPark Floating Rate Capital: 8.49% yield
If you want something truly off the radar that can help you put inflation in its place, consider buying shares of business development company PennantPark Floating Rate Capital (PFLT 0.47%). PennantPark has been doling out $0.095 per share on a monthly basis to its shareholders for almost seven years.
PennantPark primarily invests in the first-lien secured debt of middle-market businesses -- i.e., publicly traded micro-cap and small-cap companies. The reason it chooses to purchase debt in middle-market companies is because lending options for smaller companies are typically limited and, most importantly, the associated yields tend to be high.
The aspect of PennantPark that income investors are going to love is that 99.9% of its debt portfolio consists of variable-rate investments. With the Federal Reserve forecast to raise rates multiple times this year, it means added income will soon flow right to PennantPark's bottom line.
As one final note, only 3 of the 115 companies PennantPark is invested in are on nonaccrual (i.e., delinquent). That's less than 3% of its entire portfolio on a cost basis. In short, there's little concern about this high-quality payout.
Mobile TeleSystems: 13.44% yield
A fifth and final ultra-high-yield stock that can pad your pocketbook is Russian telecom giant Mobile TeleSystems (MBT). Take note that while it offers the highest yield on this list, its twice-annual payout fluctuates based on its operating results. Nevertheless, the company has consistently paid around 9% (or more) for the past five years.
The biggest catalyst for MTS, as Mobile TeleSystems is more commonly known, is the ongoing rollout of 5G wireless infrastructure in major cities. It's been a decade since a sizable upgrade to wireless download speeds was introduced. MTS will benefit from increased consumer and enterprise data usage, as well as device replacement. Since Russia is such a large country, MTS' organic boost from 5G could last throughout the decade.
The other interesting aspect of MTS is its push to become a conglomerate. Over the past couple of years, the company has moved into new verticals, such as banking, cloud computing, and streaming/paid TV. Through the first nine months of 2021, these new verticals grew their sales by 24% from the comparable period in 2020. Keeping customers within its ecosystem of products and services has been shown to significantly reduce churn.