Every so often, Wall Street sends investors a not-so-subtle reminder that stocks don't move up in a straight line. That's perhaps the best way to sum up what's happened this year. Since hitting their all-time highs, the ageless Dow Jones Industrial Average, benchmark S&P 500, and growth-driven Nasdaq Composite have all pushed into a bear market with peak-to-trough declines of greater than 20%.
Although double-digit percentage declines in the broader market can be unnerving and coerce rash decision-making, it's important to note that every big drop has represented a surefire buying opportunity for long-term investors. In other words, a bear market is always a good excuse for investors to do some shopping.
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It can be a particularly smart time to put your money to work in dividend stocks. Publicly traded companies that pay a dividend are usually profitable, time-tested, and have a rich history of outperforming stocks that don't pay a dividend over the long run.
With inflation well above historic norms, it can be especially lucrative to buy ultra-high-yield dividend stocks -- an arbitrary term I use for income stocks with at least a 7% yield -- during the 2022 bear market. What follows are three ultra-high-yield dividend stocks that are no-brainer end-of-year buys.
Enterprise Products Partners: 7.66% yield
If there's such a thing as an ultra-high-yield dividend stock worth beating the drum on, it's energy stock Enterprise Products Partners (EPD 0.56%). Enterprise sports an inflation-fighting 7.7% yield and has raised its base annual distribution in each of the past 24 years.
What makes this company so special is where it sits within the energy complex. Whereas oil and natural gas drillers tend to ebb and flow with the spot price for energy commodities, Enterprise Products Partners is anchored in as a midstream energy provider. Midstream companies operate the transmission pipelines, storage tanks, and processing facilities that move oil, natural gas, and natural gas liquids from drilling fields to docks or refineries.
The clear-as-day advantage for midstream oil and gas companies is their contracts with drilling companies. Midstream operators like Enterprise lock in long-term, fixed-fee or volume-based contracts. The cash-flow transparency provided by these contracts affords management the confidence to allocate capital for new infrastructure projects and acquisitions without threatening ongoing profitability or the aforementioned superior distribution.
Don't think for a minute that just because Enterprise Products Partners has a $54 billion market cap it's sitting on its laurels. Approximately $5.5 billion has been invested in over a dozen major projects, with over half of these projects focused on natural gas liquids. These projects should boost annual sales through at least mid-decade and make Enterprise's sub-10 forward-year price-to-earnings ratio look incredibly cheap.
As I stated last week, Enterprise should also be a prime beneficiary of a challenged global energy supply chain. Russia's invasion of Ukraine has created oil and gas supply concerns worldwide that should buoy or lift oil and gas prices. That's all the more encouragement for domestic drillers to take on new projects, and for Enterprise Products Partners to benefit from increasing energy infrastructure demand.
Alliance Resource Partners: 8.44% yield
A second ultra-high-yield dividend stock that makes for a no-brainer buy to end the year right is coal producer Alliance Resource Partners (ARLP 0.47%). Alliance Resource has raised its quarterly distribution multiple times in 2022 and is currently yielding 8.4%.
Most investors (professional and everyday) wrote coal stocks off for dead years ago. The initial stages of the pandemic, which featured lockdowns and a demand cliff unlike anything we'd seen before, didn't help the industry, either. But thanks to the noted global energy supply chain woes, the per-ton price of coal has come roaring back, and Alliance Resource Partners is benefiting big-time from it.
One of this company's biggest advantages has always been its conservative operating approach. Alliance Resource Partners has historically been very mindful of taking on debt when expanding its production. Whereas some of its peers were forced to reorganize under Chapter 11, Alliance Resource sports a reasonably low debt-to-equity ratio of 30%. Translation: It has far better financial flexibility than any coal producer.
To add to this point, the company's management team has done a bang-up job of locking in future volume and price commitments to generate transparent and predictable cash flow. As of the end of September, all of the company's 2022 production (up to 35.9 million tons) was spoken for, while a respective 32.9 million tons and 22.8 million tons for 2023 and 2024 were already locked in at favorable prices. The transparency of this cash flow so far in advance is what's allowed management to increase the company's distribution multiple times in 2022.
Something else to note about Alliance Resource Partners is that it holds oil and natural gas royalties. If the price for these energy commodities increases, there's a good chance Alliance Resource Partners will generate higher adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Given European oil and gas supply concerns, it's a reasonably good bet that energy commodity prices will remain elevated for the foreseeable future.
Valued at less than 4 times Wall Street's forecast earnings for 2023, Alliance Resource Partners is an absolute steal.
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Antero Midstream: 7.94% yield
The third ultra-high-yield dividend stock that's a no-brainer end-of-year buy is Antero Midstream (AM 0.57%). That's right, an all-energy high-yield buy list for the month of December.
As its name gives away, Antero Midstream plays a role similar to Enterprise Products Partners as an energy middleman. The key difference is that it specializes in natural gas gathering, storage, and processing, and it does so predominantly for its key customer, Antero Resources (AR 3.69%), which happens to be its parent company.
While global supply chain issues should help lift the price of natural gas, the biggest macro catalyst for Antero Midstream might just be the COVID-19 pandemic. Following years of reduced capital investment from energy majors, it'll be difficult for drilling and exploration companies to quickly increase natural gas supply. That's a recipe for a sustainably higher natural gas price that should ultimately encourage Antero Resources to expand production.
Speaking of expanded production, Antero Resources will be increasing its drilling on Antero Midstream-owned acreage in the coming years. The latter actually reduced its distribution by 27% last year to $0.90/annually in order to have plenty of capital to reinvest in energy infrastructure. Although a dividend cut would normally be a red flag, diverting this capital to new projects should increase incremental free cash flow by $200 million through mid-decade. In other words, not only is Antero Midstream's payout rock-solid at 8%, but its cash flow and earnings potential are expected to climb through at least the midpoint of the decade.
A final note about Antero Midstream is that 100% of its contracts are fixed-fee. Inflation and natural gas price volatility have no impact on what the company should receive in payment from Antero Resources and its other upstream customers.
With capital expenditures expected to taper off by mid-decade, Antero Midstream is both income and value investors' dream stock.
