Although you probably don't want or need the reminder, 2022 was a difficult year for the investing community. Unless you were heavily weighted to energy stocks, there's a good chance you had a rough year. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite were all, at least briefly, entrenched in a bear market, with the latter ending the year lower by 33%.
The silver lining amid this tumult is that stock market declines breed opportunity. Though timing the market can't be done with any consistency, buying high-quality stocks during significant dips and allowing your investment thesis to play out over time tends to be a winning strategy far more often than not.
Image source: Getty Images.
Despite large-cap tech stocks garnering seemingly all of Wall Street's focus at the moment, dividend stocks could be your safest avenue for steady returns. That's because income stocks tend to be profitable, time-tested, and have well-defined long-term growth outlooks.
But why settle for a run-of-the-mill dividend stock when you could have one that delivers an outsize payout? What follows are three ultra-high-yield dividend stocks, with yields ranging from 7.5% to 15.7%, which represent scorching-hot buys in June.
Verizon Communications: 7.54% yield
The first supercharged income stock to buy in June -- and easily the best-known company on this list -- is telecom company Verizon Communications (VZ 0.88%). Following last week's dip, Verizon's 7.5% yield is as high as it's ever been as a publicly traded company.
There look to be two core headwinds impacting Verizon's stock at the moment: rapidly rising interest rates and large-cap tech "FOMO" (fear of missing out). Since telecom stocks rely on debt financing to purchase wireless spectrum and upgrade their networks, higher lending rates could eat into their future cash flow. As for the latter, investor interest in faster-growing large-cap tech stocks has made mature, slow-growing telecom stocks Wall Street's chopped liver.
However, there are a couple of reasons patient, income-seeking investors should be extremely excited to see this dip in Verizon.
For one, telecoms provide something close to a basic necessity service. While wireless access, broadband service, and a smartphone aren't quite on par with food and water in terms of what people need to survive, historically low churn rates imply that consumers have become far less willing to give up their wireless access. Translation: Expect predictable operating cash flow from Verizon in any economic environment.
But it's not just macroeconomic factors working in the company's favor. The rollout of 5G wireless download speeds is meaningfully boosting two of its core revenue-generating segments. Following roughly a decade of 4G download speeds, the move to 5G should entice businesses and consumers to upgrade their devices for years to come. These upgrades are expected to fuel data consumption, which is great news for Verizon's wireless operating margin.
The best news for Verizon might be its newfound broadband growth. After investing heavily in midband spectrum in 2021, the company saw 437,000 net broadband additions in the March-ended quarter -- its best quarter for net additions in more than a decade. Broadband represents something of a jumping-off point that'll encourage service bundling and lift its operating margin.
Among high-yielding value stocks, you'd struggle to find a more intriguing deal than Verizon at 7 times Wall Street's forward-year consensus earnings.
PennantPark Floating Rate Capital: 11.41% yield
A second ultra-high-yield dividend stock that stands out as a scorching-hot buy in June is lesser-known business development company (BDC) PennantPark Floating Rate Capital (PFLT 1.26%). PennantPark pays its dividend monthly and has increased its payout twice over the past year.
A BDC is a type of company that invests in either the equity (common and/or preferred stock) or debt of middle-market businesses -- i.e., generally small-and-micro-cap companies. Though PennantPark held $157.2 million in equity investments at the end of March 2023, it's primarily a debt-focused BDC, as evidenced by its $1.01 billion in debt investments.
Despite being relatively unknown, PennantPark is perfectly positioned to thrive in the current economic environment.
To start with, it benefits from dealing with middle-market companies. Smaller businesses often have minimal access to debt and credit markets because they've yet to prove themselves to larger lenders. As a result, PennantPark is able to net above-average yields on the debt investments it holds. As of the end of March, the weighted average yield on its debt investments was an inflation-crushing 11.8%.
Another reason PennantPark Floating Rate Capital is crushing it is the Fed's hawkish monetary policy. Every single cent of its $1.01 billion debt investment portfolio is variable rate. This means every rate hike by the nation's central bank is increasing the yield PennantPark can expect to receive without the company having to do any extra work. Over an 18-month stretch, the company's weighted average yield on debt investments climbed from 7.4% to 11.8%.
PennantPark runs a well-diversified portfolio, as well. All but $0.1 million of the company's $1.01 billion debt portfolio is first-lien secured debt. If one of the companies PennantPark holds debt in seeks bankruptcy protection, first-lien secured debtholders are first in line for repayment. However, it should be noted that just four companies are on non-accrual (i.e., delinquent), representing a mere 2% of the cost basis of PennantPark's portfolio.
To add to the above, PennantPark Floating Rate Capital's portfolio (including common and preferred stock holdings) spans 130 companies with an average investment size of $9 million. No one company is going to sink this ship.
Trading just shy of its book value and for a mere 8 times forward earnings, PennantPark and its 11.4% yield are an under-the-radar steal.
Image source: Getty Images.
Alliance Resource Partners: 15.71% yield
The third ultra-high-yield dividend stock that's a scorching-hot buy in June is coal producer Alliance Resource Partners (ARLP -0.33%). And no, the 15.7% yield isn't a typo.
Admittedly, the idea of investing in energy stocks won't appeal to everyone. This interest probably shrinks even more when discussing coal stocks. That's because coal companies are at risk of having their core product replaced by renewable energy sources over time. Yet in spite of this risk, Alliance Resource Partners is firing on all cylinders.
Believe it or not, Alliance Resource Partners has macro tailwinds in its sails. Though the COVID-19 pandemic was initially bad news for all energy producers, it's the coal industry that's come out smelling like a rose. Whereas global oil and gas majors substantially reduced their capital investments over a three-year stretch, coal producers didn't have to pare back their spending nearly as much. When the time came to ramp up energy commodity production, it was producers like Alliance Resource Partners that were able to step up to the plate.
I'll also add to the above that Alliance Resource Partners is on much better financial footing than virtually all of its peers. The company's conservative management team has slow-stepped production expansion for years and ensured that debt levels remain manageable. As of the end of March 2023, net debt stood at $187.6 million, with the company generating $348 million in trailing-12-month levered free cash flow.
But the factor that really makes Alliance Resource Partners nothing short of a no-brainer buy is its forward-thinking management team. This is a company that continually locks in volume and price commitments up to four years in advance. This year, the company anticipates producing a midpoint of 37 million tons of coal. Alliance Resource already has 93% of its 2023 coal volume, and 63% of its 2024 coal volume (assuming no changes to what's produced this year), priced and committed. This is a surefire formula for consistent operating cash flow and a juicy dividend.
What's more, management has been locking in these commitments at favorable per-ton coal prices. Even if the price of coal reverts to its norm over the past decade, the effects of lower coal prices won't be felt for years.
The icing on the cake for Alliance Resource Partners is that it also holds oil and gas royalties. The aforementioned supply chain issues within the oil and gas industry should help buoy energy commodity prices and lift the company's profit potential.
