An irrefutable bull market is in sight. But let me explain what I mean by that.
Many investors believe we're already in a new bull market. The major market indexes are all at least 20% above their lows after falling at least 20%. That's a bull market for some.
Others think that the market indexes must check off those boxes plus reach a new all-time high. They haven't achieved this yet, but they're close. That's why I maintain that an irrefutable bull market -- one that everyone can agree on -- is in sight.
There will be plenty of growth stocks to pile into if an indisputable new bull market begins and picks up momentum. But what about ultra-high-yield dividend stocks? I think some of those stocks will be good picks as well. There's one ultra-high-yield dividend stock I think is the best to buy and hold in a new bull market.
My criteria
Before I get to that top pick, let's look briefly at the criteria that I used in my selection process. First, I define "ultra-high yield" as a yield that's at least four times greater than the yield of the SPDR S&P 500 ETF Trust. Since SPY's yield currently stands at 1.47%, my ultra-high yield threshold is 5.88%.
That's the easy part. The harder part is defining "best." In my view, the best ultra-high-yield dividend stock has a truly ultra-high yield -- closer to 10% than the cut-off of 5.88%.
That dividend, though, must be sustainable. The company should be able to fund its dividend now and in the future. A solid track record of paying (and preferably growing) dividends is also a big plus.
While dividends are great, total returns are even more important. The best ultra-high-yield dividend stock should provide both.
The best
With those criteria established, my vote for the best ultra-high-yield dividend stock goes to... Ares Capital (ARCC -0.05%). Sure, there are other impressive contenders. However, I believe that Ares Capital rises to the top.
Ares Capital's dividend yield currently stands above 9.8%. No one is going to quibble about whether or not the yield is ultra-high. The company has also declared steady or growing regular dividends for 56 consecutive quarters.
This solid track record is a testament to Ares Capital's underlying business strength. Ares Capital ranks as the largest publicly traded business development company (BDC). It provides financing to middle-market businesses and arguably is the best in the industry.
Ares Capital is highly selective about the transactions it funds. Its average closing rate is around 5%. The BDC avoids deals with companies in especially volatile industries. Its portfolio is diversified across more investments than its peers. As a result of this superior risk management, Ares Capital's loss rate is well below the industry average.
The company operates in a growing market. Many banks have pulled back from direct lending to middle-market businesses over the years. These businesses have increasingly turned to BDCs such as Ares Capital.
Finally, Ares Capital has generated total returns that have handily beaten the S&P 500 since the company's initial public offering in October 2004. But that outperformance isn't only due to strong total returns in its early days. Ares Capital has beaten the S&P 500 over the last three years and five years as well.
What if the bull market fades?
While an irrefutable bull market is in sight, it hasn't arrived yet. There's a chance that the major market indexes won't reach new all-time highs. Even if they do, it's possible that the new bull market could quickly fade.
Would Ares Capital still be the best ultra-high-yield dividend stock to buy and hold if that happens? I think so.
The stock fared better than the S&P 500 did during last year's market sell-off. Those juicy dividends helped cushion Ares Capital's decline considerably, too.
Importantly, Ares Capital stock isn't overvalued like many stocks are these days. Its shares trade at a forward price-to-earnings ratio of only 8.5x. By comparison, the S&P 500's forward earnings multiple is 19.6x. I expect that Ares Capital's attractive valuation would keep it from falling as heavily as many other stocks during a downturn.
There are other stocks that could deliver better total returns during bull markets. There are others that could outperform during bear markets. But if you're looking for the best ultra-high-yield dividend stock to buy and hold with a new bull market in sight, I think that Ares Capital is it.
