It's been a difficult five months to be an investor on Wall Street. Since the year began, all three major U.S. indexes have declined by a double-digit percentage, with the growth-heavy Nasdaq Composite faring the worst (a peak-to-trough decline of 31% since mid-November).
If a tumbling market weren't enough, the U.S. inflation rate is also bordering on 40-year highs -- 8.3% over the trailing-12-month period, as of April 2022. What cash folks do have sitting on the sidelines is being eroded by historically high increases in the price for various goods and services.
Although investor sentiment is rightly depressed, the discount in equities is the perfect opportunity for opportunistic investors to do some shopping.
Dividend stocks can be your golden ticket
If you're wondering what to buy, look no further than dividend stocks. Companies that provide passive income to investors on a regular basis can somewhat or entirely offset the impact of historically high inflation.
What's more, dividend stocks have a knack for substantially outperforming their non-dividend-paying peers. Back in 2013, J.P. Morgan Asset Management, a division of the nation's largest bank by assets, JPMorgan Chase, released a report comparing the performance of dividend stocks to non-payers over a 40-year period (1972-2012). Whereas publicly traded stocks that didn't pay a dividend averaged a meager 1.6% annual return over four decades, the income stocks delivered an annualized return of 9.5% over the same stretch.
Because dividend stocks are almost always profitable on a recurring basis and have weathered multiple economic downturns, they're just the type of tried-and-true businesses we'd expect to increase in value over time.
Of course, not all income stocks are created equally. Since yield is a function of payout relative to share price, a struggling or failing business model with a plummeting share price can offer the false hope of a sustainably high dividend. In other words, income stocks with really high yields need to be thoroughly vetted.
The good news is that some ultra-high-yield stocks -- an arbitrary term I'm using to describe income stocks with at least a 7% yield -- are amazing values and can sustain their exorbitant payouts. What follows are three no-brainer ultra-high-yield dividend stocks investors can confidently buy in June.
Annaly Capital Management: 13.23% yield
The first passive income powerhouse that's begging to be bought in June is the kingpin of mortgage real estate investment trusts (REITs), Annaly Capital Management (NLY -0.52%). Annaly's 13.2% yield is the highest on this list, with the company averaging around a 10% yield over the past two decades.
Although the assets mortgage REITs buy can be complex, Annaly's operating model is straightforward. This is a company that aims to borrow money at low short-term lending rates, and uses this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The bigger the difference between the average yield on its MBSs minus its average borrowing rate, the higher the company's net interest margin.
At the moment, Annaly couldn't possibly be facing a more difficult environment. The Treasury-bond yield curve flattened during the first quarter (i.e., the difference between short-and-long-term bond yields shrank) and the Federal Reserve is rapidly increasing interest rates, which is pushing up borrowing costs. While this has weighed on Annaly's book value in the near-term, history has shown that buying high-quality mortgage REITs when things are at their worst is a smart move.
For example, rising interest rates should increase the yields on the MBSs Annaly purchases over time. When coupled with the steepening of the yield curve that often accompanies a rebounding economy, Annaly's net interest margin is likely to begin trending higher within the next 12-to-24 months.
Further, the company's first-quarter report showed that $76.1 billion of its $84.4 billion in total assets were tied up in agency securities. "Agency" assets are backed by the federal government in the event of default. This added protection allows Annaly to lever up its portfolio to maximize its profit potential.
Investors should also consider the power behind Annaly's whopper dividend. Even though Annaly's share price has declined by 47% since its initial public offering in 1997, the total return for investors, including dividends, is nearly 800%! That's 225 percentage points better than the S&P 500 over 24-1/2 years.
Sabra Health Care REIT: 8.68% yield
A second ultra-high-yield dividend stock that makes for a no-brainer buy in July is Sabra Health Care REIT (SBRA -0.14%). Sabra is currently sporting an 8.7% yield, which is toward the higher-end of its payout range over the past decade.
As an owner of more than 400 combined skilled nursing and senior housing facilities, Sabra Health Care faced the headwind of all headwinds when the COVID-19 pandemic struck. Though COVID-19 can be deadly for people of all ages, seniors suffered a particularly high mortality rate with the initial strain of the SARS-CoV-2 virus. This had Wall Street and investors on edge and wondering if Sabra's tenants would pay their bills.
More than two years after the COVID-19 pandemic was declared, Sabra can confidently say it weathered the storm and remained a financially sound company. It's collected 99.5% of forecasted rents since the pandemic began, and its tenants have enjoyed a steady rebound in skilled nursing and senior housing occupancy rates since the beginning of 2021.
Sabra has made a number of moves to position itself for the future and solidify its highly predictable cash flow for years to come. For instance, it reworked a master lease agreement with key tenant Avamere in early February. This agreement allows Sabra to potentially collect more in rent if Avamere's operating performance dramatically improves. Sabra also formed a joint venture with Sienna Senior Living that allowed it to push into Canada's senior housing market.
If you need one more solid reason to trust Sabra Health Care, consider this: the U.S. boomer population is aging, and at least some of these folks will lean on skilled nursing facilities or senior housing communities in the coming decades. This suggests Sabra's rental-pricing power is set to improve over time.
Antero Midstream: 8.17% yield
A third no-brainer ultra-high-yield dividend stock investors can confidently buy in June is Antero Midstream (AM 1.61%). Antero has the "lowest" yield on this list at 8.2%. However, an 8.2% annual payout is about 500% higher than the S&P 500's dividend yield, so I doubt shareholders are complaining.
Back in March 2020, most energy stocks were steamrolled by the demand shock associated with the initial wave of the pandemic. Domestic and international lockdowns caused the price of crude oil and natural gas to tumble, which pummeled exploration and production companies. But if there's one energy subsector that emerged relatively unscathed, it's midstream operators like Antero.
Antero Midstream is a middleman that provides natural gas gathering, compressing, and processing, as well as water delivery, for parent company Antero Resources (AR 2.72%) in the Appalachian Basin. The beauty of Antero Midstream's operating model is that 100% of its contracts are fixed fee. This means wild vacillations in the price of natural gas won't impact the operating cash flow it'll receive from Antero Resources. The transparency of this operating cash flow is paramount to outlaying capital for new infrastructure projects.
What makes Antero Midstream such an intriguing company moving forward is Antero Resources commitment to boosting production with natural gas hitting multidecade highs. Some of this new production will come from acreage owned by Antero Midstream.
Although Antero Midstream reduced its payout by 27% last year, it had a good reason to do so. Modestly lowering its payout will provide more capital in the short run for infrastructure projects, which, according to the company, should result in $400 million in incremental free cash flow by mid-decade. In other words, the company's $0.90 annual distribution is completely sustainable through 2025, and its operating earnings should notably increase in the coming years.
To build on this point, Antero Midstream expects to significantly improve its balance sheet flexibility. With capital expenditures expected to decline in 2023 and operating cash flow climbing, the company will have more firepower to tackle its outstanding debt and lower its leverage.