Regardless of how long you've been investing, it's been a difficult year. Since hitting their respective all-time closing highs between mid-November and the first week of January, the iconic Dow Jones Industrial Average, broad-based S&P 500, and technology-driven Nasdaq Composite, have shed as much as 19%, 24%, and 34% of their value.
While the expediency of these moves lower has been unnerving, history has shown time and again that stock market corrections and bear markets are the ideal time to do some shopping. That's because every major decline throughout history has eventually been cleared away by a bull market.
It's an especially smart time to consider putting your money to work in dividend stocks. Companies that regularly pay a dividend are often profitable on a recurring basis and have navigated their way through economic downturns before. What's more, income stocks have a rich history of handily outperforming publicly traded stocks that don't pay a dividend over the long run.
However, not all dividend stocks aren't created equally. Since yield is simply a function of payout relative to share price, a struggling company with a falling share price can turn out to be nothing more than a yield trap. In other words, companies with high yields often require some extra vetting.
The good news is that there are a number of extremely safe ultra-high-yield dividend stocks (an arbitrary term I'm using to describe income stocks with yields of at least 7%) that can help pad investors' pocketbooks during a period of unprecedented uncertainty. What follows are three of the safest ultra-high-yield dividend stocks on the planet.
AGNC Investment Corp.: 12.6% yield
The first extremely safe passive-income powerhouse that investors can confidently add to their portfolios is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 0.56%). AGNC has the highest yield on this list and has offered a double-digit yield in 12 of the past 13 years.
Although the products AGNC buys can be somewhat complicated, AGNC's operating model is relatively straightforward. This is a company that aims to borrow money at the lowest short-term rate possible and uses this capital to acquire higher-yielding long-term assets, such as mortgage-backed securities (MBS). AGNC's purpose is to widen its net interest margin, which is the average yield of its owned assets minus the company's average borrowing rate.
What makes the mortgage REIT industry so appealing from an investing standpoint is that there are rarely surprises. If you keep a close eye on the interest rate yield curve and Federal Reserve monetary policy, you'll generally have a good idea of whether or not AGNC and its peers are dealing with a favorable or unfavorable environment.
At the moment, things probably couldn't be worse for mortgage REITs. The interest rate curve has flattened or inverted for some maturities, and the Fed is aggressively raising interest rates in an effort to bring down historically high inflation. But the interesting thing about mortgage REITs is that they often make for the perfect buy when things seem their bleakest.
For instance, even though rapidly rising interest rates will increase short-term borrowing costs, higher rates should have a noticeably positive impact on MBS yields over time. Further, the interest rate yield curve spends far more time steepening than flattening.
Something else to consider about AGNC is that $66.9 billion of its $68.6 billion in assets are of the agency variety. An "agency" security is backed by the federal government in the unlikely event of a default. This added protection is what allows AGNC to rely on leverage to boost its profit potential.
PennantPark Floating Rate Capital: 9.51% yield
If you're looking for something that's well off most income investors' radar's, business development company (BDC) PennantPark Floating Rate Capital (PFLT 1.86%) is a second exceptionally safe ultra-high-yield dividend stock that can confidently be bought right now. PennantPark offers a hearty 9.5% yield and has paid a $0.095 monthly dividend for more than seven years.
As a BDC, PennantPark predominantly invests in the first-lien secured debt of middle-market companies. In plainer English, this means that PennantPark buys the debt that's first in line to be paid out if a company files for bankruptcy.
To add, a "middle-market company" is typically a publicly traded business that has a market cap of less than $2 billion. Because small-cap companies may not be time-tested, their access to credit markets is often limited. This is what's allowed PennantPark to average a juicy 7.5% yield on its debt investments, as of March 31, 2022.
But what really makes PennantPark Floating Rate Capital so attractive is the composition of its debt investments. As of the end of March, 100% of its $1.03 billion debt portfolio was of the variable-rate variety. With the nation's central bank having no choice but to rapidly raise interest rates to combat historically high inflation, PennantPark's debt investment portfolio has become a veritable gold mine. Every rate hike makes PennantPark's secured loans that much more valuable to the company's income stream.
Interestingly, though, focusing on middle-market companies hasn't tarnished the quality of the debt that PennantPark is holding its investment portfolio. Only two of its 119 investments were on non-accrual, as of the end of March. This equates to a little over 2% of the company's portfolio on a fair value basis.
In other words, PennantPark is perfectly positioned to take advantage of an inflationary environment.
Altria Group: 8.65% yield
A third extremely safe ultra-high-yield dividend stock that can be bought with confidence is tobacco giant Altria Group (MO -0.05%). Altria is currently sporting an 8.65% yield and has been one of the top-performing publicly traded companies of the past half-century.
In one respect, tobacco stocks like Altria are now just a shell of their former selves. A better understanding of the long-term negative effects of smoking tobacco products has weighed on adult smoking rates in the U.S. for more than 50 years. To boot, Altria received quite the kick in the pants in June 2022 when vape brand Juul was banned from being sold by the U.S. Food and Drug Administration. Juul's products will be allowed to stay on store shelves during the appeals process. Altria took a 35% stake in Juul back in December 2018.
Yet in spite of these headwinds, Altria Group remains a rock-solid business. To begin with, tobacco products contain nicotine, and nicotine is an addictive chemical. Even with persistent cigarette volume declines, Altria possesses strong enough pricing power on its tobacco products to keep its revenue and profit needle moving in the right direction.
What's more, Altria has demonstrated a willingness to invest in vape products and tobacco alternatives. If the company's Juul investment were to fall in value by more than 90%, Altria would have the opportunity to partner with other vape companies or develop its own vape brands. In short, Juul's potential failure is far from damning for Altria.
To build on this point, Altria has also taken a sizable stake in Canadian licensed cannabis producer Cronos Group. The expectation is that an eventual legalization of cannabis in the U.S. will allow Cronos to enter the far more lucrative U.S. market. Altria is expected to aid Cronos with marketing and product development, if and when such federal legalization occurs.
The point is that while Altria's operating model isn't the growth story it once was, it's still just as safe as ever. This company is a money machine with a rich history of returning capital to shareholders via its lucrative dividend and hefty share buybacks.