Every so often, the stock market presents investors with what can be best described as a "buckle up and hold on" sort of year. That's what we're in now. All three major U.S. stock indexes have plummeted firmly into a bear market in 2022, with the technology-driven Nasdaq Composite losing as much as 38% of its value from its all-time high set in November.
Although long-term investors are probably well aware of the incredible opportunity they're being given by this pullback to put their money to work, figuring out where to invest their money is the challenge. Dividend stocks might be the answer.
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Companies that pay a regular dividend are almost always profitable, and they've navigated their way through stock market turbulence before. More importantly, they have a history of outperforming companies that don't pay a dividend over the long term, which makes them a potentially smart buy during the bear market decline.
Though high-yield income stocks can have their downsides, they too can be phenomenal buys (if properly vetted by investors) and provide a comforting hedge as the market sinks in the short run.
If you were to invest a total of $31,300, split equally between the following three ultra-high-yield income stocks, which are producing an average yield of 12.79%, you'd be able to collect $1,000 in quarterly dividend income.
AGNC Investment: 18.6% yield
Mortgage real estate investment trust (REIT) AGNC Investment (AGNC 0.99%) is the first passive-income powerhouse to put your money to work in if you want to outpace inflation and hedge against a topsy-turvy market. Though AGNC's super-high yield might seem too good to be true, this is a company that's averaged a double-digit yield for all but one of the past 13 years. AGNC also pays its dividend monthly.
Mortgage REITs like AGNC Investment are companies that want to borrow money at the lowest short-term rate possible and use it to purchase higher-yielding assets, such as mortgage-backed securities (MBSs). It's a pretty straightforward operating model that leads to few surprises. Since the Federal Reserve's monetary policy and interest rate yield curve dictate how mortgage REITs perform, the mortgage REIT industry is usually predictable.
Currently, AGNC and its peers are fighting their way through the toughest climate for mortgage REITs in over a decade. Rapidly rising interest rates are increasing short-term borrowing costs, and an inverted yield curve is weighing on AGNC's net interest margin and book value. But as I've opined previously, this industry makes for a genius bad-news buy.
For example, even though higher interest rates are increasing short-term borrowing costs, it'll have a positive impact on the yields of the MBSs AGNC is buying. Over time, this should increase the company's net interest margin and book value.
AGNC's approximately $61.5 billion investment portfolio is also heavily swayed toward agency securities. Agency assets are protected by the federal government in the event of default. While this added protection does lower the yields AGNC Investment receives on the MBSs it buys, it also allows the company to wisely use leverage to increase its profits. In other words, AGNC's investment portfolio is a lot safer than many of its peers.
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PennantPark Floating Rate Capital: 11.03% yield
A second ultra-high-yield dividend stock that can pack a punch for income seekers and help provide $1,000 in quarterly dividend income is business development company (BDC) PennantPark Floating Rate Capital (PFLT 1.07%). PennantPark has been doling out a $0.095 monthly dividend for more than seven years, which currently equates to a juicy 11% yield.
BDCs come in two forms: Those that invest in the equity of middle-market companies (i.e., businesses with market caps of $2 billion or lower) and those that invest in the debt of middle-market companies. Although 13% of PennantPark's portfolio is tied up in the equity and preferred stock of middle-market companies, it falls into the latter category as a debt-focused BDC.
The beauty of PennantPark's operating model is threefold. First off, middle-market companies are usually unproven, which means they'll have limited access to the credit market. By focusing on these smaller businesses, PennantPark is able to generate a higher yield on the debt it holds. Through the midpoint of 2022, it was generating a weighted average yield of 8.5% on its debt investments.
Secondly, 100% of the company's debt investment portfolio is of the variable-rate variety. This means that as the Federal Reserve increases interest rates, the rates on every single outstanding loan held by PennantPark will rise in lockstep. PennantPark won't have to lift a finger to increase its weighted average yield on debt investments over the coming quarters.
Thirdly, all but $700,000 of the company's approximately $1.07 billion in debt investments are first-lien secured. First-lien-secured debt is first in line for repayment in the event that a company seeks bankruptcy protection. Focusing on first-lien-secured debt, as well as spreading its investment across more than 100 companies, helps to de-risk PennantPark's portfolio.
Antero Midstream: 8.73% yield
The third ultra-high-yield income stock that can help you generate $1,000 in quarterly dividend income with an initial investment of $31,300 (again, split three ways) is natural gas stock Antero Midstream (AM 0.72%). Unlike AGNC and PennantPark, you'll only receive a quarterly dividend payment from Antero Midstream. However, with an 8.7% annual yield, the payout is worth the wait.
With the memory of 2020 still fresh in their minds, some investors are bound to be leery of trusting oil and gas stocks. The historic demand drawdown associated with the initial stages of the COVID-19 pandemic caused oil and gas prices to plummet. With concerns mounting about the U.S. entering a recession this year or possibly in 2023, there remain plenty of worries about a repeat occurrence for the industry.
However, Antero Midstream is well protected from commodity spot-price volatility. That's because it's a midstream operator, which effectively means it's an energy middleman. Antero Midstream's primary customer is its parent company, Antero Resources (AR 1.49%), for which it provides natural gas gathering, compression, processing, and water delivery services.
What makes Antero such a great dividend stock is that its contracts are entirely on a fixed-fee basis. This means neither inflation nor commodity price volatility have any effect on the company's operating cash flow. Being able to accurately forecast its annual cash flow is important, since it allows Antero Midstream to set aside capital for infrastructure projects, acquisitions, and its quarterly distribution, without any worry that it'll adversely affect profitability.
Investors digging into Antero Midstream will likely note that it cut its quarterly payout by 27% last year. While this would normally be a red flag for income seekers, this is one of the rare instances where it's not. With Antero Resources wanting to increase drilling on Antero Midstream-owned acreage, the latter reduced its payout to ensure it would have enough capital handy for infrastructure projects to meet the demands of this new drilling activity. Antero Midstream believes it'll bring in $200 million in added incremental free cash flow from this drilling activity through 2025.
