There have been a number of challenging investment periods over the past quarter of a century, including the dot-com bubble, financial crisis, and coronavirus crash. However, none has been as brutal as the bear market investors are enduring now. The bond market is in the middle of its worst year ever, while the benchmark S&P 500 delivered its worst first-half return in more than a half-century.
While bear market drops can be unnerving, especially for newer investors, they've long represented opportunities for successful money managers to deploy their capital. Throughout much of 2022, billionaire money managers have been actively putting money to work in the stock market.
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Perhaps most intriguing is that select billionaires have been aggressively adding to existing positions in ultra-high-yield dividend stocks. ("Ultra-high-yield" is an arbitrary term I'm using for income stocks with yields of at least 7%.) Because dividend stocks are usually profitable and time-tested, they can make for smart buys during a bear market.
What follows are three ultra-high-yield dividend stocks with 8%-plus yields that billionaires absolutely love.
AGNC Investment: 18.2% yield
The first passive-income powerhouse that select billionaire money managers haven't been able to stop buying is mortgage real estate investment trust (REIT) AGNC Investment (AGNC 0.99%). The company is a monthly dividend payer with a jaw-dropping yield of greater than 18%. For context, the company has averaged a double-digit yield in all but one of the past 13 years.
Billionaire Ken Griffin of Citadel Advisors purchased more than 4.27 million shares of AGNC during the second quarter. Meanwhile, billionaire fund manager Israel Englander of Millennium Management opened a position totaling close to 2.81 million shares in the June-ended quarter.
Without digging too far into the weeds, mortgage REITs want to borrow money at the lowest short-term lending rate possible and buy higher-yielding assets, such as mortgage-backed securities (MBS), with this capital. That's how the industry got its name (Mortgage REIT).
The problem of late has been the Federal Reserve's historically hawkish monetary policy, aimed at taming inflation. Rapidly rising interest rates have quickly pushed up short-term borrowing costs. When this is coupled with an inverted yield curve, both net interest margin and book value have declined for AGNC. This means lower near-term profits and a lower share price, given that most mortgage REITs stay close to their respective book values.
But there may be light at the end of the tunnel for this disliked industry. Though higher interest rates are pushing up short-term borrowing costs, they'll also lift the yields on the MBS that AGNC continues to buy. Over time, this could be a recipe for net interest margin expansion.
Furthermore, AGNC runs an incredibly "safe" investment portfolio. All but $1.7 billion of its approximately $61.5 billion investment portfolio is in agency assets, as of the end of September. An "agency" asset is backed by the federal government in the event of a default on the underlying security. This added protection allows AGNC to deploy leverage to boost its profit potential.
Sabra Health Care REIT: 9.5% yield
A second ultra-high-yield dividend stock that billionaire money managers clearly love is Sabra Health Care REIT (SBRA 1.71%). Sabra's 9.5% yield is more or less right in the middle of its yield range over the past six years.
Based on Form 13F filings with the Securities and Exchange Commission, Citadel's Griffin and Millennium's Englander respectively added around 1.46 million shares and 1.95 million shares of Sabra Health Care to their funds' existing positions during the June-ended quarter. With Sabra's share price sinking over the past couple of years, Citadel's and Millennium's purchase activity looks to be an indication of REIT bargain hunting among billionaires.
The biggest issue for Sabra, the owner of more than 400 total facilities involved in skilled nursing and senior housing, has been the COVID-19 pandemic. Although COVID-19 can be dangerous for all age groups, it hit seniors particularly hard. There were periods of heightened uncertainty in 2020 where occupancy rates fell and the prospect of rental delinquencies rose.
Thankfully, the worst never materialized for Sabra. However, this doesn't mean the company was unfazed.
For instance, it was forced to rework its master lease agreement with one of its top renters, Avamere, which would almost certainly have defaulted on some of its rental obligations without some adjustments. The new agreement worked out with Avamere gives Sabra Health Care an opportunity to recoup higher rental rates if Avamere's operating performance improves.
Since the depths of the pandemic in late 2020, Sabra has seen the occupancy rates for its skilled nursing and senior-housing communities steadily rebound. Previously, the company has noted a rental-collection rate in the mid-99% percentile since the pandemic began.
With the worst of the pandemic now likely in the rearview mirror, attention can be turned to improving the company's balance sheet (i.e., lowering its debt leverage by selling a handful of its skilled nursing properties), and positioning itself to take advantage of an aging North American population. As the population ages and the need for senior housing and skilled nursing care grows, Sabra may find it has significant rental-pricing power.
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Altria Group: 8.4% yield
The third ultra-high-yield dividend stock billionaires absolutely love is tobacco behemoth Altria Group (MO 1.91%). The company is known for targeting a payout ratio of around 80% and is currently yielding 8.4%.
As stock market volatility picked up in the first-half of the year, billionaire Jim Simons of Renaissance Technologies, along with billionaires John Overdeck and David Siegel of Two Sigma Investments, sought the perceived safety of buying into Altria. Simons oversaw the addition of just over 5 million shares during the second quarter, while Overdeck and Siegel added roughly 3.52 million shares to their fund's stake.
If there's one big knock against U.S. tobacco stocks like Altria, it's that growth has slowed to a crawl. As consumers have become knowledgeable over many decades concerning the dangers of using tobacco products, adult smoking rates have precipitously declined. That's bad news from a volume perspective for Altria -- but it doesn't tell the full story.
For example, Altria possesses exceptionally strong pricing power that usually helps it outpace any declines in cigarette shipment volume. Since the nicotine found in tobacco is an addictive chemical, the company is well-aware that its products are treated as nondiscretionary items. No amount of price inflation has scared away its core customers yet.
To add to this point, it helps when you're the company behind America's favorite premium cigarette brand. As of the end of June, Altria accounted for 48.2% of total U.S. cigarette share, with Marlboro tallying 42.7% by itself.
Altria's ventures into alternative tobacco products are intriguing, as well. Though its investment in vaping company Juul hasn't panned out, Altria hasn't ruled out additional investments in vape companies. Further, it took a $1.8 billion equity stake in Canadian licensed cannabis producer Cronos Group in 2019. If and when the U.S. federal government gives cannabis a green light, Altria will be ready to step in with product development, marketing, and distribution guidance for Cronos.
Tobacco stocks aren't the growth story they once were, but they continue to deliver steady, albeit modest, gains for their shareholders.
