It's been a wild year on Wall Street. After hitting their respective all-time closing highs between mid-November and early January, the timeless Dow Jones Industrial Average, broad-based S&P 500, and growth-centric Nasdaq Composite have plunged by 19%, 24%, and 34%, at their peaks. You'll note by the magnitude of these declines that both the S&P 500 and Nasdaq were mired in a bear market.
Although double-digit percentage declines in the market can be unnerving and test the resolve of investors, they're also the ideal time to put money to work. After all, every sizable decline in the major indexes throughout history has, eventually, been erased by a bull market. Billionaire money managers know this all too well.
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Despite market turmoil during the second quarter, select billionaire investors chose to pile into three "ultra-high-yield" dividend stocks -- an arbitrary term I like to use to describe companies doling out a yield of at least 7%. What follows are three widely held ultra-high-yield dividend stocks that billionaires can't stop buying.
Enterprise Products Partners: 7.12% yield
The first passive-income powerhouse that Wall Street can't seem to get enough of is oil and gas stock Enterprise Products Partners (EPD +0.65%). Enterprise Products is doling out a 7.1% yield and has raised its base annual distribution in each of the past 24 years.
For some investors, oil stocks are off-limits. It was only two years ago this past April that a historic demand drawdown in crude oil sent West Texas Intermediate futures to as low as negative $40 per barrel. But energy price volatility certainly didn't scare off billionaire Jeff Yass of Susquehanna International during the second quarter. Yass' fund added close to 715,000 shares, which increased its position to roughly 774,200 shares.
NYSE: EPD
Key Data Points
Although COVID-19 lockdowns and pandemic-related declines in economic activity adversely affected drilling and exploration companies, Enterprise Products Partners was mostly unscathed. Its secret to success is being one of the nation's largest midstream operators. A "midstream" company operates the transmission pipelines, storage tanks, and processing facilities that are necessary to move oil, natural gas, and natural gas liquids from drilling fields to their end points. Essentially, Enterprise Products Partners is one of the country's largest energy middlemen.
What's advantageous about midstream operators is that they almost always rely on fixed-fee (in Enterprise's case) or volume-based contracts. In other words, no matter how volatile crude oil and natural gas prices become, Enterprise Products Partners can accurately forecast its operating cash flow in a given year. This comes in handy when outlaying capital for new projects, acquisitions, and its quarterly distribution.
As one final note, Enterprise Products Partners' payout wasn't in jeopardy during the pandemic. The company's distribution coverage ratio (DCR) never fell below 1.6 in 2020. The DCR measures the amount of distributable cash flow from operations relative to what was distributed to investors. This ratio would have needed to fall to 1 or below for this distribution to be in trouble.
NYSE: MO
Key Data Points
Altria Group: 7.93% yield
The second ultra-high-yield dividend stock billionaires can't stop buying is tobacco giant Altria Group (MO +0.69%). Though Altria isn't exactly a household name, its top-tier brand of cigarettes, Marlboro, absolutely dominates the premium cigarette category in the U.S.
Altria has endured its fair share of bad news lately. The company's investment in vaping company Juul hasn't panned out as expected, with the U.S. Food and Drug Administration potentially removing Juul's products from store shelves in the future. To add, adult smoking rates have been on a fairly steady decline since the mid-1960s.
Yet in spite of these challenges, billionaire Jim Simons of Renaissance Technologies has been a buyer. The most recent quarter saw Renaissance add just north of 5 million shares of Altria, which increased its June-ended stake to almost 8.78 million shares. Altria Group is one of the top-performing stocks, on a total return basis (i.e., including dividends paid), over the past 50 years.
Even though cigarette adult-use rates have been falling, Altria has one key catalyst in its corner: pricing power. Because the nicotine found in tobacco is addictive, tobacco-containing products tend to act like nondiscretionary goods. In short, consumers will buy tobacco products no matter how high inflation gets or how poorly the economy performs. Altria's incredible pricing power has often helped it more than offset volume weakness.
Altria is also investing for its future. Despite its Juul investment (likely) falling flat, the company has also put $1.8 billion to work in Canadian licensed cannabis producer Cronos Group. If and when the U.S. federal government legalizes cannabis, Cronos would be able to enter the considerably more lucrative U.S. marijuana market. Altria would be there to assist with product development, marketing, and distribution in a country it knows well.
Even with tobacco stocks well past their heyday, they can still be moneymakers for patient investors.
Image source: Getty Images.
Annaly Capital Management: 13.56% yield
The third ultra-high-yield dividend stock that billionaires can't stop buying is none other than mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 0.66%). Annaly has roughly averaged a double-digit yield over the past two decades, and its 13.6% yield is tops on this list.
The billionaire in question who can't seem to get enough Annaly Capital for his fund's portfolio is Ken Griffin of Citadel Advisors. Citadel purchased more than 2.11 million shares of Annaly Capital Management in the second quarter, which lifted its total stake to a little over 3.28 million shares.
What makes mortgage REITs like Annaly so attractive is the transparency of their operating models. In simple terms, mortgage REITs aim to borrow money at the lowest short-term lending rate. They then use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBSs). The wider the gap (known as net interest margin) between the yield received from assets owned minus the borrowing rate, the more profitable the mortgage REIT.
NYSE: NLY
Key Data Points
To understand how the mortgage REIT industry is performing, investors simply need to follow Federal Reserve monetary policy and the interest rate yield curve. Recently, a flattening yield curve and rapidly rising interest rates have hurt Annaly's book value and weighed on its net interest margin. But it's not all bad news.
Although higher interest rates are increasing short-term borrowing costs, they'll also boost the yields on the MBSs Annaly is purchasing. Over time, as the interest rate yield curve steepens in response to disproportionately longer periods of economic expansion, Annaly's net interest margin should climb.
Furthermore, the vast majority of Annaly's investment portfolio is comprised of agency securities. An "agency" asset is backed by the federal government in the unlikely event of default. While this added protection does lower the yield Annaly nets on the MBSs it buys, it also allows the company to utilize leverage to increase its profit potential.
Annaly Capital Management looks to be an intriguing bad-news buy.
