Dividend stocks generally outperform other asset classes during bear markets. The primary reason is that regular cash distributions help to smooth out market volatility in terms of an equity's total return on capital. Plus, passive income stocks likely benefit from an "oasis effect" during turbulent markets. Dividend stocks, in short, quickly become hot commodities during bear markets because of their perceived safety relative to pure-play growth or value stocks.
Which passive income stocks should investors consider buying right now? Golden Ocean Group (GOGL -0.54%) and Icahn Enterprises (IEP 0.65%) both sport ultra-high dividend yields, fundamentally strong businesses, and a proven ability to generate healthy levels of free cash flows in an uncertain economic environment. Read on to find out more about these elite passive income stocks.
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Golden Ocean Group: A 28% annualized yield
Bermuda-based Golden Ocean Group is a leading dry bulk shipping company. With a shipping fleet of 97 vessels, the company's core business is the transport of bulk commodities such as ores, coal, grains, and fertilizers.
Golden Ocean's stock was a pandemic darling due to elevated shipping rates and sky-high demand for bulk commodities. Between 2020 and 2021, for instance, the shipping company's shares gained a healthy 60% and produced a total return on capital (including dividends) of 89.9% for shareholders. Since hitting this high-water mark, however, Golden Ocean's shares have lost 7.2% in 2022. Nonetheless, the company's stock has still produced a healthy total return on capital of approximately 10% this year, thanks to its eye-catching annualized dividend yield of 28%.
Why has Golden Ocean's stock stumbled in 2022? This downward trend is the result of a host of factors, such as China's slowing economic growth, lower demand for bulk commodities in general, easing of freight rates across the globe, and uncertainty about the sustainability of its enormous dividend yield.
Why is this ultra-high-yield dividend stock a contrarian buy? While the company's business is slowing down, this softer outlook appears to be priced into its stock price at this point. Golden Ocean's shares are presently trading at under seven times 2023 projected earnings. The industry average price-to-earnings ratio, by contrast, stood at 15.4 as recently as the second quarter of 2022. Golden Ocean's shares thus appear to be deeply undervalued right now.
Icahn Enterprises: A 15% annualized yield
Icahn Enterprises is a diversified holding company with interests in a wide array of economic sectors such as finance, healthcare, automotive, real estate, consumer goods, and energy. The company is named after its founder and majority shareholder, Carl Icahn. Icahn Enterprises' core business strategy is acquiring undervalued companies, improving their financial results, and eventually selling them off at a substantial profit.
This strategy, known as activist investing, has allowed the diversified holding company to generate a noteworthy 14% average annual return on capital for the past 21 years. This stately rate of return is nearly double that of the S&P 500, Dow Jones Industrial, and Russell 2000 indexes over the same period. And at the heart of Icahn Enterprises' market-crushing returns on capital is its jaw-dropping annualized yield, which currently sits at approximately 15%. Thanks to its stellar yield, Icahn's namesake fund has produced total returns on capital of nearly 23% so far in 2022.
Why is Icahn Enterprises stock still a table-pounding buy? Carl Icahn has a proven track record of identifying underperforming businesses, deploying capital in a timely manner to gain a controlling interest, and subsequently profiting on the company's eventual sale. This activist playbook, so to speak, is a tried-and-true pathway to profitability. And most importantly, its success doesn't depend on the broader economic climate. Icahn's largely recession-proof business, coupled with its ginormous dividend yield, should therefore appeal to investors on the hunt for a viable safe haven in this turbulent market.
