There's no question that investing during a bear market can be challenging. Thankfully, dividend stocks can make your life easier.
Companies that pay a regular dividend have a knack for making their shareholders richer. A report released in 2013 from J.P Morgan Asset Management, a division of banking giant JPMorgan Chase, found that dividend-paying companies crushed non-payers in the return column over the long run. Publicly traded companies that initiated and grew their payouts between 1972 and 2012 delivered an annualized return of 9.5%, which compares quite favorably to the 1.6% annualized return for stocks without a dividend.
In a perfect world, income investors would be able to net the highest yields possible with little or no risk. But based on data in the real world, investing risk and yield tend to go hand-in-hand. In other words, ultra-high-yield stocks -- those I'm arbitrarily defining as having yields in excess of 7% -- can sometimes be more trouble than they're worth. Since yield is a function of payout relative to share price, a struggling business has the potential to trap investors looking for a juicy yield.
But this isn't the case with all ultra-high-yield dividend stocks. If you want a boatload of annual income to hedge against the current bear market, a number of top-notch high-yielding stocks are at your disposal.
For example, if you want $1,000 in annual dividend income, all you'd need to do is invest $9,950 into the following ultra-high-yield trio, which sports an average yield of 10.06%.
Enterprise Products Partners: 7.8% yield
The first supercharged dividend stock that can help you bring in $1,000 in annual dividend income with an initial investment of less than $10,000 is energy stock Enterprise Products Partners (EPD 0.73%). Despite having the "lowest" yield of this stock trio at 7.8%, Enterprise has increased its quarterly distribution in each of the past 24 years.
While some investors might have reservations about putting their money to work in an oil and gas stock with the memory of 2020 still fresh in their minds, let me assure you that Enterprise doesn't share the same commodity price risk that prominent oil and gas stocks contend with. That's because it's a midstream energy company.
In simple terms, Enterprise is a middleman tasked with moving oil and natural gas, as well as storing oil, gas, natural gas liquids, and refined products. The vast majority of Enterprise Products Partners' contracts with upstream drillers are long-term and fixed-fee. In other words, it's able to accurately forecast its operating cash flow in a given year no matter how volatile the spot price is for oil and natural gas. This forecast is important in that it allows management to outlay capital for new infrastructure projects, acquisitions, and the company's distribution, without adversely impacting profitability.
Something else working in Enterprise's favor is the dysfunction of the global energy supply chain. Well before Russia invaded Ukraine in February 2022, capital investments for energy projects were reduced by the pandemic. Not having an easy path to quickly increase the supply of oil and natural gas as demand ramps back up has provided a lift to oil and gas prices. That should encourage more production in the U.S. and give Enterprise Products Partners a pathway to secure new long-term contracts.
Enterprise Products Partners is also working with a $2 billion share buyback program. As with any buyback, reducing the number of shares outstanding (or common units in the case of Enterprise) can make each remaining share (or unit) that much more valuable. Further, it can lift earnings per share.
PennantPark Floating Rate Capital: 9.69% yield
A second high-octane income stock that can help you net $1,000 in annual dividend income with an initial investment of $9,950 is little-known business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.52%). PennantPark pays its dividend on a monthly basis and has been doling out a steady $0.095/month for more than seven years.
Without getting overly complicated, BDCs are companies that invest in the equity or debt of middle-market companies -- i.e., businesses with market valuations of less than $2 billion. Though PennantPark held $154.5 million in common and preferred stock in middle-market companies, as of Sept. 30, 2022, it's primarily a debt-focused BDC, with roughly $1.01 billion in its debt investment portfolio.
There are three core advantages this debt portfolio provides PennantPark Floating Rate Capital and its shareholders. First, the company enjoys well-above-average yields. Since smaller businesses tend to be unproven and have limited access to debt and/or credit markets, PennantPark is able to generate higher yields on the debt it holds.
Secondly, the entirety of PennantPark's $1.01 billion debt investment portfolio is variable rate. Given that the Federal Reserve has no choice but to aggressively hike interest rates to tame inflation, it means businesses holding outstanding variable-rate debt should see their net-interest income tied to that debt rise. As of the end of September, PennantPark's weighted average yield on debt investments was 10%, which is up from 7.4% in the prior-year quarter.
And third, 99.99% of the company's debt investment portfolio is comprised of first-lien secured notes. In the event that a company seeks bankruptcy protection, first-lien secured debtholders are first in line for repayment. Choosing to focus on first-lien secured debt ensures that PennantPark's diversified portfolio -- $1.164 billion invested across 125 companies -- is sufficiently de-risked.
AGNC Investment: 12.68% yield
The third ultra-high-yield dividend stock that can help you collect $1,000 in annual dividend income with a $9,950 initial investment is mortgage real estate investment trust (REIT) AGNC Investment (AGNC 0.31%). AGNC's roughly 12.7% yield is the highest on this list and certainly not outside the norm. AGNC has averaged a double-digit yield in all but one of the past 14 years. What's more, it's also a monthly dividend payer.
Everything you need to know about the mortgage REIT industry can be explained by closely monitoring the Treasury bond yield curve and Federal Reserve monetary policy. That's because mortgage REITs seek to borrow money at the lowest short-term rate possible and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS).
Last year was Murphy's Law in action for AGNC and its peers. Whereas PennantPark has benefited from rapidly rising interest rates, it clobbered AGNC with higher short-term borrowing costs. Further, the inversion of the yield curve has weighed on the company's book value and net interest margin -- the difference between the average yield of its owned assets minus its average borrowing cost.
The good news for AGNC Investment is that long-term trends are very much in its favor. For example, the yield curve spends most of its time sloped up and to the right, with longer-dated bonds (10-year and 30-year) boasting higher yields than shorter-dated bonds. If the yield curve inversion ends in 2023, as I recently predicted it would, AGNC should see a modest lift to its net interest margin.
Likewise, higher interest rates provide a push-pull dynamic on its operating performance. While higher rates increase short-term borrowing costs, they also increase the yields on the MBSs the company purchases. Over time, the average yield on its owned assets would be expected to climb, which is also good news for its net interest margin.
But it's the makeup of AGNC's investment portfolio that really provides protection. The bulk of its $61.5 billion investment portfolio is tied up in agency MBSs. "Agency" assets are backed by the federal government in the event of default. Having this backdrop behind its MBSs is what allows AGNC the confidence to utilize leverage to bolster its profits.