This year has left few safe-havens for the investing community. The bond market is struggling through its worst year on record, while the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all, respectively, plunged into a bear market with peak-to-trough losses easily topping 20%.
While it's common for heightened periods of volatility to test investors' resolve, it's also the ideal time to go shopping. Historically, every bear market has eventually been put into the rearview mirror by a bull market rally. The same will undoubtedly prove true with the current bear market.
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It can also be an especially good time to go bargain hunting for dividend stocks. Publicly traded companies that pay a dividend are almost always profitable on a recurring basis and offer clear long-term growth outlooks. Most importantly, they have a knack for substantially outperforming stocks that don't pay a dividend over long periods.
In an ideal world, income investors want the highest yield possible with the least amount of risk. Unfortunately, the investing world is far from ideal. Studies have shown that once yields hit 4%, risk and yield tend to rise in-tandem. Since yield is a function of payout relative to share price, a struggling or failing operating model that weighs down a company's share price can trick investors into thinking they're getting a supercharged yield, when they've actually fallen for a value trap.
In other words, high-yield stocks require a lot of extra vetting by investors and are sometimes not worth the trouble. But this isn't always the case.
What follows are three of the safest ultra-high-yield dividend stocks on the planet that income seekers can confidently buy right now.
Enterprise Products Partners: 7.67% yield
Perhaps the safest high-yield dividend stock in the entirety of the energy sector is Enterprise Products Partners (EPD 0.18%). Enterprise is currently dishing out a 7.7% yield and has increased its base annual payout for 24 consecutive years.
To some, the idea of investing in oil and gas stocks sends shivers down their spine. That's because oil and natural gas demand fell off a cliff during the initial stages of the COVID-19 pandemic lockdowns in 2020. Drilling stocks were absolutely whipsawed over a span of a few months, with West Texas Intermediate crude oil futures briefly hitting negative $40 per barrel.
Let me allay your fears: Enterprise Products Partners doesn't have to worry about vacillating spot prices. That's because it's a midstream company operating more than 50,000 miles of transmission pipeline, 14 billion cubic feet of natural gas storage, and has two dozen natural gas processing facilities. In short, it's an energy middleman tasked with getting product from the fields to refineries or ports.
The important thing to note about midstream operators is that they almost exclusively utilize long-term fixed-fee or volume-based contracts. No matter how volatile spot prices are for oil and natural gas, these contracts allow Enterprise to accurately and transparently forecast its operating cash flow in a given year. Knowing this cash-flow figure is critical, since it's what allows the company to set aside capital for infrastructure projects and acquisitions without impacting its distribution or profitability.
Speaking of its distribution, at no point during the worst of the pandemic did Enterprise Products Partners' distribution coverage ratio (DCR) fall below 1.6. The DCR examines the company's distributable cash flow from operations relative to what was paid to shareholders. A figure of 1 or below would imply an unstainable payout.
The company also has $5.5 billion worth of infrastructure projects in its (bad pun alert!) pipeline that should mostly come online by the end of 2023. As domestic drilling needs grow, Enterprise Products Partners looks like a shoo-in to benefit.
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PennantPark Floating Rate Capital: 10.01% yield
The second ultra-high-yield dividend stock that I'd classify as one of the safest on the planet to buy now is little-known business development company (BDC) PennantPark Floating Rate Capital (PFLT 1.26%). PennantPark is parsing out the juiciest yield on this list (10%), and has been paying a steady monthly dividend of $0.095/share for more than seven years.
BDC's predominantly invest in middle-market companies -- those with market caps of $2 billion or less -- and either focus on equity or debt. Although PennantPark's $1.16 billion portfolio consists of $154.5 million in various common and preferred stock positions, the bulk (87%) of its investments are tied up in corporate debt.
Why the debt of middle-market companies? First of all, smaller businesses usually have fewer choices when it comes to accessing the debt/credit market. As a result, holders of middle-market company debt receive a juicy yield. As of the end of September, PennantPark had a 10% weighted average yield on its debt investments.
Also, 100% of the debt in PennantPark Floating Rate Capital's investment portfolio is of the variable-rate variety. With the Federal Reserve rapidly raising interest rates to counter historically high inflation, the yield PennantPark is netting on its more than $1 billion in corporate debt is increasing, too. At the end of June, the company's weighted average yield on its debt investments was 8.5%. As noted, it's now 10%. Higher rates are a great thing for this company.
Further, it's important to note that PennantPark has almost exclusively purchased first-lien secured debt (all but $0.1 million of its $1.01 billion is first-lien secured debt). First-lien secured debt is first in line to collect in the event of a bankruptcy. By choosing to invest in first-lien secured debt, PennantPark has greatly de-risked its debt investment holdings.
Antero Midstream: 8.17% yield
The third exceptionally safe ultra-high-yield dividend stock that investors can buy right now is natural gas stock Antero Midstream (AM 1.25%), which checks in with a rock-solid 8.2% yield.
Similar to Enterprise Products Partners, there might be some leeriness among investors about trusting energy stocks following what happened in 2020. But as its name implies, this is a midstream energy company. It primarily provides gathering, compression, water delivery, and natural gas processing for parent company Antero Resources (AR -1.03%) in the Appalachia region -- specifically, the Utica and Marcellus Shale.
The single best reason to buy Antero Midstream is that 100% of its contracts are fixed-fee. This means the company is completely protected from inflation and (drum roll) can accurately predict its annual operating cash flow. Having this transparency is what allowed the company to pull the trigger on a $205 million deal in September to acquire gathering and compression assets from Crestwood Equity Partners in the Marcellus Shale.
Another factor working in Antero Midstream's favor (as well as Enterprise Products Partners, for that matter) is that the global energy complex is a complete mess. The pandemic led energy companies to dramatically reduce their capital investments. When coupled with Russia's invasion of Ukraine earlier this year, there are clear supply concerns as energy demand ramps up. This scenario could lead to sustainably higher oil and gas prices, which would encourage additional drilling and boost demand for energy infrastructure.
The other big catalyst is Antero Resources plan to increase drilling on Antero Midstream's acreage. The latter actually reduced its quarterly distribution by 27% in 2021 to prepare for this increase in drilling. While a payout reduction would normally be a red flag, there's a very good reason for it. The extra capital Antero Midstream "saves" via the dividend reduction can be funneled to infrastructure expansion to account for its parent company's increased drilling. This is expected to result in $200 million in added incremental cash flow by mid-decade.
