Whether you're a new or tenured investor, you've probably been taken on a wild ride during the first quarter of 2022. Both the benchmark S&P 500 and iconic Dow Jones Industrial Average briefly dove by more than 10% from their all-time closing highs, while the technology-dependent Nasdaq Composite backed as much as 22% off its record high set in November.
But if history has taught investors anything, it's that significant pullbacks in the stock market are the ideal time to put your money to work. Every major correction in the broad-market indexes throughout history has eventually been erased by a bull market rally.
The simple question is: Which stocks to buy?
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Ultra-high-yield income stocks can be your path to riches
The best answer to that question might just be dividend stocks.
Nine years ago, J.P. Morgan Asset Management, a division of banking giant JPMorgan Chase, released a report comparing the annualized performance of companies that paid dividends between 1972 and 2012 to publicly traded stocks that didn't offer a payout over the same time frame. The results showed a night-and-day difference. The income stocks delivered a hearty average annual gain of 9.5% over four decades, whereas the non-dividend payers clawed to an annual average return of a meager 1.6%.
These results shouldn't be all that surprising. Companies that pay a regular dividend are often profitable on a recurring basis, time-tested, and have transparent long-term outlooks. They're the type of businesses we'd expect to increase in value over time.
But not all income stocks are created equally. In fact, studies have shown that risk and yield tend to correlate once a company's yield hits 4% or higher. This is a fancy way of saying that chasing high-yield stocks won't always pay off.
However, not all ultra-high-yield stocks are bad news (note, I'm arbitrarily defining "ultra-high-yield" as a company with a yield of at least 7%). The following three ultra-high-yield dividend stocks are begging to be bought in April and can make patient investors a lot richer.
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Enterprise Products Partners: 7.2% yield
First up is oil and gas stock Enterprise Products Partners (EPD 0.18%), which is parsing out a 7.2% yield.
Some investors may be leery about putting their money to work in oil stocks following the historic demand drawdown that occurred during the initial stages of the pandemic in 2020. There's no question that, for a short period, drillers and exploration companies took it on the chin.
But Enterprise Products Partners is a different beast entirely. It's a midstream oil and gas company, which makes it the middleman of the energy complex. It operates approximately 50,000 miles of pipeline, 14 billion cubic feet of natural gas storage capacity, and has 20 natural gas processing facilities. Whereas wild vacillations in the price of crude can hurt drilling companies, Enterprise Products Partners, which relies on contracts that lock in volume and price, isn't affected. This cash flow transparency is critical to the company's success.
For example, having a clear long-term outlook allows Enterprise Products Partners to outlay capital for new infrastructure projects and/or acquisitions without adversely affecting profitability or the company's juicy distribution. In January, it announced a $3.25 billion acquisition of Navitas Midstream Partners. This added another natural gas processing facility and approximately 1,750 miles of transmission pipeline. More importantly, it'll boost distributable cash flow by $0.18 to $0.22 per unit in 2023.
A quick look at Enterprise Products Partners' balance sheet and income statement should quickly alleviate any fears about the quality of this company's payout. Even during the height of the COVID-19 pandemic, the company's distribution coverage ratio -- i.e., the amount of distributable cash flow generated from operations relative to what was distributed to investors -- never fell below 1.6. A reading below 1 would signify an unsustainable payout. Additionally, the company has upped its base annual payout for 23 consecutive years (and counting).
With crude and natural gas prices surging, demand for energy infrastructure is once again booming. That bodes extremely well for Enterprise Products Partners' long-term outlook.
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PennantPark Floating Rate Capital: 8.4% yield
A second ultra-high-yield income stock begging to be bought in April is business development company (BDC) PennantPark Floating Rate Capital (PFLT 1.26%). At 8.4%, PennantPark has the highest yield of the three stocks I'm discussing, and is the only company on this list to pay its dividend on a monthly basis.
As a BDC, PennantPark almost exclusively invests in first-lien secured debt from middle-market companies, while also sprinkling in a small amount of equity holdings, such as preferred stock. "Middle-market companies" are typically publicly traded businesses with a market cap below $2 billion.
The reason PennantPark chooses to hold first-lien secured debt from small-cap and micro-cap companies is simple: their access to the debt market is limited. As a result, PennantPark can generate well-above-average yields from its debt investments. According to the company, the weighted average yield on its debt investments was a healthy 7.5%, as of the end of 2021.
What's particularly interesting about the company's debt investments is that 99.9% of its nearly $1.03 billion debt portfolio is of the variable-rate variety. This means that if interest rates rise, the yield on 99.9% of the company's debt investments will rise, too. With domestic inflation soaring to 40-year highs, the Federal Reserve has made clear that it'll be raising lending rates multiple times throughout 2022. That's great news for PennantPark.
To add, the quality of debt investments held by PennantPark remains strong. Just three of the 115 companies PennantPark has investments in were on non-accrual (i.e., delinquent) as of the end of 2021, which represents only 2.5% of the investment portfolio on a fair-value basis. The company's $0.095 monthly payout looks as rock-solid as ever.
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Sabra Health Care REIT: 8.1% yield
The third ultra-high-yield dividend stock begging to be bought in April is healthcare-focused real estate investment trust (REIT), Sabra Health Care REIT (SBRA -0.22%). Sabra owns and leases well over 400 skilled nursing and senior housing facilities.
As you can probably imagine, Sabra Health Care was taken for an unpleasant ride during the initial stages of the pandemic. Since senior citizens are particularly vulnerable to COVID-19, occupancy rates at the company's senior housing and skilled nursing facilities declined quite a bit. This raised concerns about possible rent delinquencies.
But for well over a year there's been good news on virtually all fronts for Sabra. Both skilled nursing and senior housing occupancy rates bottomed out more than a year ago and have been steadily rebounding. Sabra announced in February that 99.6% of forecasted rents have been collected since the start of the COVID-19 pandemic.
Furthermore, Sabra recently reworked its master lease agreement with Avamere to resolve concerns about current and future rental payments. Avamere, which leases 27 properties from Sabra, has been hit hard by the pandemic. The new lease agreement gives Avamere some breathing room, while also allowing Sabra the opportunity to recoup additional rental income if a full rebound takes shape.
With the worst of the COVID-19 pandemic (hopefully) in the rearview mirror, investors can once again focus on Sabra being perfectly positioned to take advantage of an aging domestic population. Last year, Sabra put more than $419 million to work in investments with a "weighted average estimated stabilized cash yield of 7.6%," according to the company.
With healthcare being a highly defensive sector, Sabra Health Care REIT looks like a smart way to play the recent dip in the broader market.
