Investing on Wall Street means taking the bad with the good at times. As much as we'd prefer the stock market never have a down day, stock market corrections, crashes, and bear markets are a normal part of long-term investing.
When bear markets arise, as one did last year for all three major U.S. stock indexes, it's not uncommon for investors to seek the safety provided by dividend stocks. Companies that dole out a regular dividend tend to be profitable and time tested. In other words, they're well positioned to navigate the uncertainty that accompanies a bear market.
Income stocks also have a phenomenal track record of outperforming publicly traded companies that don't offer a dividend.
Image source: Getty Images.
But not all dividend stocks are created equally, and investors have to be particularly mindful of ultra-high-yielding companies -- those I'm arbitrarily defining as having yields of 7% or above. Since yield is a function of payout relative to share price, a company whose operating model is struggling or failing can lure income seekers in with a high yield (caused by a falling share price) and effectively "trap" them.
Thankfully, there are high-quality supercharged income stocks that are ripe for the picking. What follows are three ultra-high-yield dividend stocks that are surefire buys in April.
Innovative Industrial Properties: 9.47% yield
The first ultra-high-yield dividend stock that stands out as a no-brainer buy in April is marijuana-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR 0.37%). IIP, as the company is more commonly known, has grown its quarterly distribution by 1,100% since September 2017 and is currently yielding almost 9.5%.
The operating premise with IIP is no different from other REITs. Its goal is to purchase properties and lease them out for long periods. The only difference is IIP is purchasing and leasing medical marijuana cultivation and processing facilities in legalized states.
As of the end of 2022, IIP owned 110 properties covering 8.7 million square feet of rentable space in 19 states. The weighted-average remaining lease length was a little north of 15 years, which should lead to relatively predictable cash flow.
The worry of late for Innovative Industrial Properties, and the reason its stock has been nothing short of a buzzkill for the past year, is that its on-time rent collection rate has fallen. After collecting 100% of its rents on time for years, IIP's rent-collection rate was only 92% for February. This has skeptics worried about the financial state of the cannabis industry and the multi-state operators (MSOs) IIP has leased to.
However, the good news is that IIP is tackling what should be short-term rent collection issues head on. Whether it's selling properties, reworking master lease agreements, or transferring lease agreements to new parties, the company's adjusted funds from operations looks relatively safe. All REITs eventually deal with delinquencies, and it would appear that IIP is handling this hiccup quite well.
Another key aspect of Innovative Industrial Properties' portfolio is that it's 100% triple net leased. A triple net lease requires the tenant to cover all property costs, including insurance, property taxes, and maintenance, in addition to utilities. The advantage of this type of lease structure is that IIP doesn't have to worry about any surprise expenses.
With cannabis expected to be one of the fastest-growing industries of the decade in the U.S., Innovative Industrial Properties looks to be well positioned to capitalize on this growth trend.
Lincoln National: 8.01% yield
A second ultra-high-yield dividend stock that's a surefire buy in April is life insurance and retirement planning company Lincoln National (LNC 1.54%). Lincoln National's yield has soared to 8% as its share price has plummeted over the past five months. But this is an instance of a broken stock, not a broken company.
Lincoln National's troubles began in early November, which is when the company announced its third-quarter operating results. Lincoln National booked $2 billion in unfavorable items related to "updated guaranteed universal life insurance lapse assumptions," as well as took a $634 goodwill charge for its life insurance business.
The second proverbial kick in the pants for Lincoln National occurred over the past month, with the regional banking tumult taking its toll. Lincoln National held approximately $89 million of Silicon Valley Bank unsecured debt, which represented a tad over 1% of its total surplus when 2022 came to a close, according to S&P Global. Silicon Valley Bank is the banking subsidiary of SVB Financial, which was seized by regulators in March.
Despite taking its medicine in a big way over the past five months, Lincoln National isn't a broken business model -- and the company's fourth-quarter (Q4) operating results show it. The company's average in-force face value for its life insurance business grew by double digits from the comparable quarter in 2021, and retirement plan services showed net inflows of $235 million compared to outflows of $380 million in Q4 2021. As long as the company's various operating segments continue to grow and generate inflows, it'll have no trouble replenishing the capital needed to further strengthen its balance sheet.
Another positive for Lincoln National that might be flying under investors' radars is the Federal Reserve's hawkish monetary policy. While higher interest rates aren't helping consumers with variable-rate outstanding debt, insurers that carry unused premium (known as float) tend to benefit in the form of higher investment income when interest rates rise.
Lastly, most insurance companies possess exceptionally strong premium pricing power. While rough quarters are an inevitability for insurers, they're able to use this inevitability as reason to increase premiums in any economic environment.
Image source: Getty Images.
Antero Midstream: 8.58% yield
The third ultra-high-yield dividend stock that's a surefire buy in April is energy stock Antero Midstream (AM 0.72%). With its $0.90 base annual distribution, Antero Midstream is on track to deliver a nearly 8.6% yield to its investors.
Admittedly, some folks are going to be leery about investing in oil and gas stocks. Three years ago, initial lockdowns tied to the pandemic sent demand for oil and natural gas plummeting. For a very brief period, West Texas Intermediate crude oil futures turned negative. To boot, natural gas endured its worst quarterly performance in history (based on futures contracts) during the first quarter of 2023.
But Antero Midstream is largely protected from the wild vacillations in energy commodity prices. As a midstream operator -- primarily for parent Antero Resources (AR 1.49%) -- Antero provides gathering, processing, storage, and water services for natural gas producers in the Marcellus and Utica Shale. Since 100% of its contracts are fixed fee, the effects of inflation, as well as market-based spot-price volatility for natural gas, are completely taken out of the equation.
Normally, a company that reduces its distribution is typically viewed as a red flag for dividend investors. In 2021, Antero Midstream cut its annual payout by 27% to the aforementioned $0.90.
But there's actually a very good reason management took this step. Given Antero Resources' desire to expand drilling on Antero Midstream-owned acreage, the latter wanted to ensure it had abundant capital to complete projects designed to handle an increase in production. According to Antero Midstream, these investments should lead to a $200 million boost to incremental free cash flow through 2025.
Antero Midstream is also expanding its infrastructure capacity through bolt-on acquisitions. In September, it announced the purchase of natural gas and compression assets in the Marcellus Shale from Crestwood Equity Partners for $205 million. This deal should provide an immediate lift to Antero Midstream's free cash flow.
The final point to make about Antero Midstream is that its heftier capital expenditures are now in the rearview mirror. As capital expenditures fall in the quarters and years to come, expect the company's financial flexibility to improve as it pays down outstanding debt.
