You aren't imagining things: That cash in your wallet isn't going nearly as far as it used to.
According to data from the U.S. Bureau of Labor Statistics, the trailing-12-month inflation rate hit 8.3% in April. That's just a hair below the four-decade high of 8.5% reached a month prior. While some level of inflation is normal and healthy, too much of it can cause consumers and businesses to pass on discretionary purchases. It's why the Federal Reserve has chosen to get aggressive with interest rate hikes.
However, not all stocks respond poorly to high-inflation environments. In fact, three ultra-high-yield dividend stocks -- an arbitrary term I'm using to describe income stocks with at least a 7% yield -- tend to thrive off of high inflation.
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Antero Midstream: 8.81% yield
The first supercharged passive income stock that's expected to excel during periods of historically high inflation is natural gas company Antero Midstream (AM 0.72%).
For some investors, the idea of putting your money to work in the energy sector after what happened in 2020 won't be palatable. As a refresher, initial lockdowns tied to the COVID-19 pandemic caused crude oil and natural gas demand to crater, which in turn weighed on the price of both commodities. As you can imagine, this significantly dented the profit potential and balance sheets of upstream drillers.
What makes Antero Midstream such an intriguing company is its role in the energy complex. As its name implies, it's a midstream operator. It provides gathering, compression, natural gas processing, and water delivery for parent company Antero Resources (AR 1.49%), one of the nation's largest natural gas producers. Because Antero Midstream relies entirely on fixed-fee contracts for its services with Antero Resources, inflation has no impact on the cash flow it'll generate from those contracts.
But just because Antero Midstream isn't directly helped by inflation, that doesn't mean the company won't see benefits. As inflation picks up and the price for natural gas soars to multidecade highs, parent Antero Resources is more incentivized to drill.
A lot of this new drilling is set to occur on Antero Midstream's owned acreage. To ensure it has the necessary infrastructure in place, Antero Midstream reduced its quarterly distribution by 27% last year in order to have more capital at the ready. The expectation is for the company to generate $400 million in incremental free cash flow through 2025 as new drilling and reduced capital expenditures over time bolster its operating performance.
With an improving balance sheet and an 8.8% yield, Antero Midstream looks like a solid play in a high-inflation environment.
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PennantPark Floating Rate Capital: 10.02% yield
For a second ultra-high-yield stock that can outperform with inflation soaring, look way off the radar to business development company (BDC) PennantPark Floating Rate Capital (PFLT 1.07%). PennantPark has the highest yield on this list (10%) and happens to parse out its dividend monthly.
As a BDC, PennantPark primarily invests in the first-lien secured debt of middle-market companies (i.e., mostly publicly traded companies with market caps under $2 billion). As of the end of March, 87% of its portfolio consisted of first-lien secured debt, with virtually all of the remainder tied up in preferred stock and common equity. It's worth noting that in the event of a bankruptcy, first-lien secured debtholders are first in line for payout.
If you're wondering "Why middle-market companies?" the answer is simple: They generate a higher yield on investment for PennantPark. Access to debt markets can be limited for small-cap companies, which is what's allowed PennantPark to generate a 7.5% yield on its debt investments.
What's noteworthy about the company's $1.03 billion debt portfolio is that 100% of it is variable-rate. With prices soaring, the Fed has no choice but to rapidly increase interest rates to temper inflation. Each of these rate hikes makes PennantPark's variable-rate secured loans more lucrative for the company.
Something else to consider is that despite focusing on smaller businesses that might otherwise be considered risky or unproven, the company had only two of its 119 investments on non-accrual (i.e., delinquent on their payments) at the end of March. This works out to a reasonably low 2.3% of the company's overall portfolio on a fair value basis.
As inflation soars and the Fed tightens, PennantPark is smiling all the way to the bank.
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Alliance Resource Partners: 7.4% yield
The third ultra-high-yield stock that can soar in the wake of historically high inflation is coal producer Alliance Resource Partners (ARLP 0.19%).
If you thought oil and gas stocks left a bad taste in investors' mouths back in 2020, let me introduce you to coal stocks. This is an industry that was battered by climate activism, low per-ton prices, and a demand drop-off tied to initial pandemic lockdowns. To boot, quite a few coal companies were over-leveraged, leading to minimal or nonexistent financial flexibility as demand and prices tumbled. Although Alliance Resource Partners shelved its dividend for a year during the height of the pandemic, things were never that dire for what's easily the best-managed coal producer.
One reason this is the premier name to own in the coal space is its highly predictable cash flow. According to the company's first-quarter operating results, 34.2 million tons out of its production forecast of 35.5 million tons to 37 million tons in 2022 is price-committed. Next year, the company already has volume and price commitments on 19.9 million tons. It's not uncommon for the company to lock in volume and price commitments three or four years in advance.
Where inflation comes into play for Alliance Resource Partners is on the commodity front. Even though the company could face higher labor costs, any increase from input costs is more than offset by the 738% jump in per-ton coal prices since mid-2020. Locking commitments in now with coal prices skyrocketing is what's allowed the company to, once again, rapidly boost its quarterly distribution.
To make things even sweeter, Alliance Resource partners also holds oil and gas royalty assets that are benefiting immensely from higher prices. With oil and gas at multidecade highs, the company recognized a 139% year-over-year increase in segment-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first quarter.
As long as energy supply chains remain challenged, Alliance Resource Partners should benefit.
