It doesn't matter if you've been investing for decades or are relatively new to putting your money to work on Wall Street -- 2022 has proved to be one of the most challenging years on record. The benchmark S&P 500, which is typically viewed as the best barometer of Wall Street's health, turned in its worst first-half performance in 52 years. Meanwhile, all three major U.S. stock indexes have firmly fallen into a bear market.
While the velocity and unpredictability of bear market drops can be scary, history conclusively shows that buying these dips is a genius move. That's because every bear market has eventually been cleared away by a bull market rally.
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One of the smartest moves investors can make right now is to buy dividend stocks. Companies that pay a regular dividend are often profitable and time tested. Even more importantly, income stocks have vastly outperformed nonpayers over long periods.
Ideally, income investors want the highest yield possible with the least amount of risk. Unfortunately, studies have shown that risk and yield tend to correlate once you hit high-yield status (4% and over). However, this isn't the case with all high-yield stocks.
These three ultra-high-yield stocks -- an arbitrary term I'm using to describe stocks with yields of 7% and over -- offer sustainable payouts and are begging to be bought by opportunistic income seekers in October.
Enterprise Products Partners: 7.99% yield
The first supercharged dividend stock that's ripe for the picking amid heightened volatility is energy stock Enterprise Products Partners (EPD 0.48%). Enterprise Products sports a roughly 8% yield and has increased its base annual payout for 24 consecutive years.
For some investors, the idea of investing in oil and natural gas stocks is enough to make them cringe. Just two and a half years ago, the initial stages of the COVID-19 pandemic sent crude oil and natural gas demand off a cliff. For a very brief time, West Texas Intermediate oil futures traded as low as -$40 per barrel.
With this volatility still fresh in the minds of many investors, oil and gas stocks aren't typically viewed as sources of safe income. But there are exceptions.
Enterprise Products Partners is a midstream oil and gas operator. Midstream companies are essentially middlemen that move, store, and occasionally process oil, natural gas, and natural gas liquids. Enterprise operates more than 50,000 miles of transmission pipeline, can store 14 billion cubic feet of natural gas, and has two dozen natural gas processing facilities.
What makes midstream companies so special is they almost always rely on long-term fixed-fee or volume-based contracts. Enterprise Products leans on the former, which means its operating cash flow is highly predictable and virtually immune to volatility in oil and natural gas spot-price movements. Being able to accurately forecast its cash flow in advance is what allows Enterprise Products Partners to apportion capital for new projects and acquisitions without adversely impacting its distribution or profitability.
Something else to keep in mind is that the global energy supply chain remains broken. Russia's invasion of Ukraine, coupled with reduced capital investment from global energy majors during the pandemic, is likely to constrain supply for years. The expectation is for energy commodity prices to remain elevated for the foreseeable future. This should encourage more upstream drilling activity, which ultimately boosts demand for energy infrastructure.
Innovative Industrial Properties: 8.14% yield
A second ultra-high-yield income stock that's begging to be bought in October is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR 0.06%). Over the past five years, IIP, as Innovative Industrial Properties is more commonly known, has grown its quarterly payout by 1,100%.
As with all REITs, IIP's goal is to purchase properties that can be leased for extended periods to generate steady operating cash flow and profits. The only real difference here is IIP is purchasing medical marijuana cultivation and processing facilities in legalized states. As a reminder, marijuana is still a federally illicit substance.
As of early September, Innovative Industrial Properties owned 111 properties spanning 8.7 million square feet of rentable space in 19 legalized states. Although acquisitions account for most of the company's revenue and profit growth, it is able to generate modest organic growth. Every year, the company can pass along inflationary rental increases to its tenants. Additionally, it collects a 1.5% property management fee tied to this ever-increasing base annual rental rate.
The great thing about REITs is that they tend to produce very predictable cash flow -- and Wall Street likes when things are predictable. Through the end of June, IIP was collecting 99% of its rents on time. Though it does have one delinquent tenant, there have been discussions about moving these leases to another multi-state operator (MSO).
Perhaps the most intriguing thing about Innovative Industrial Properties is that it's actually benefiting from the lack of cannabis reform progress on Capitol Hill. As long as marijuana remains illegal, MSOs will have limited access to basic financial services. IIP has been stepping in with its sale-leaseback program to resolve some of these issues.
Under the sale-leaseback program, IIP purchases properties with cash that MSOs use to buoy their balance sheets. IIP then leases the property back to the seller for an extended length of time. This tool has helped IIP land a number of high-quality, long-term tenants.
With cannabis expected to be one of the fastest-growing industries of the decade, Innovative Industrial Properties looks well-positioned to capitalize on this buzz.
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Altria Group: 9.31% yield
The third ultra-high-yield dividend stock begging to be bought in October is tobacco stock Altria Group (MO 0.12%). Altria's 9.3% yield is the high-water mark on this list, and a function of the company's management team pledging to return approximately 80% of earnings per share as a dividend to shareholders.
Whereas most stocks are being hammered by high inflation and the growing prospect of a U.S. recession, Altria's biggest headwind is volume. Since the mid-1960s, adult smoking rates in the U.S. have declined by more than two-thirds. Educating the public about the increased risks of smoking tobacco products has been effective at reducing smoking rates in future generations.
This would seem to be bad news for Altria. However, it's not as bad as you might think. Despite this precipitous decline in adult smokers in the U.S., Altria has always maintained exceptionally strong pricing power. Because the nicotine found in tobacco is an addictive chemical, consumers tend to be willing to absorb price increases.
Over the years, Altria has been able to offset volume declines with higher prices. It also doesn't hurt that the company's premium brand, Marlboro, is the most popular cigarette brand in the U.S.
While Altria hasn't had any trouble living off of the immense cash flow of its traditional tobacco operations, the company's future lies with a variety of alternative consumption options. For example, the company announced late last week that it would end its noncompete deal with vaping company Juul Labs (Altria owns a 35% stake in Juul) and potentially make investments in other vape product companies.
Additionally, Altria Group completed a $1.8 billion deal to acquire a 45% equity stake in Canadian licensed cannabis producer Cronos Group (CRON 0.41%) in March 2019. If and when the U.S. federal government legalizes marijuana, Cronos would be free to enter the more lucrative U.S. market. Altria would almost certainly play a pivotal role in helping Cronos develop, market, and distribute higher-margin vape products throughout North America.
It would also be wise not to overlook Altria's capital return program. Aside from its juicy dividend, management is expected to complete a $3.5 billion authorized buyback before the end of the year. Buying back stock reduces the number of shares outstanding, which can boost earnings per share for a company with steady or rising net income.
Even though the growth heyday for tobacco stocks has long since passed, Altria Group can still be a steady wealth builder for patient investors.
