With stocks, bonds, exchange-traded funds, and derivatives to choose from, the stock market gives everyday investors an endless array of options. If you're feeling a bit overwhelmed by all the different investment approaches your brokerage offers, I have good news for you.
Buying shares of businesses that produce profits and commit to returning those profits to their shareholders is an investing strategy with a terrific track record. During the 50-year period from 1973 through 2022, the average dividend-paying stock in the benchmark S&P 500 index delivered a 9.3% average annual return, according to Hartford Funds and Ned Davis Research. Stocks in the same index that didn't pay a dividend fell by 0.6% annually, on average.
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The following two stocks appear likely to outperform the average dividend-paying stock in the benchmark indexes. Plus, they offer exceptionally high yields that they appear to be able to maintain.
AT&T
If you're looking for reliable dividend stocks with ultra-high yields, it's hard to do better than AT&T (T 1.02%). Shares of the telecom giant offer a huge 7.6% yield at recent prices.
Shares of the phone and internet service provider have fallen about 23% in 2023 as investors worry about a high debt load and potential litigation regarding lead-lined cables. Ma Bell laid down a lot of lead-lined copper wires around the middle of the 20th century, but federal and state governments have been responsible for regulating lead exposure for decades.
Holding a company liable if it followed prevailing regulations seems like an uphill battle that the U.S. Justice Department and Environmental Protection Agency (EPA) aren't interested in pursuing. The EPA directed AT&T and Verizon to provide some data this July, but the agency has since been quiet about the matter.
Selling off its media assets helped reduce AT&T's debt load, but the company was still sitting on $132 billion in net debt at the end of June. That works out to about 3.1x the amount of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) that management expects this year. By the first half of 2025, the company expects net debt to fall to just 2.5x adjusted EBITDA.
It doesn't look like AT&T is going to have a hard time keeping up with dividend payments. The company generated $18.2 billion in free cash flow over the past 12 months and needed just 44.6% of this sum to meet its dividend commitment.
As a telecom giant, AT&T isn't going to grow by leaps and bounds, but it is growing steadily. The company has added at least 200,000 new AT&T Fiber subscribers per quarter for 14 straight quarters, and this isn't the only growth driver. Its network covers 175 million people with midband 5G capability, and this figure should reach 200 million by the end of 2023.
PennantPark Floating Rate Capital
PennantPark Floating Rate Capital (PFLT 0.61%) is a business development company, or BDC, which means it has to distribute nearly all the profit it generates to shareholders as a dividend. This BDC pays dividends monthly. At recent prices, it offers a huge 11.6% yield.
PennantPark and similar BDCs make loans to midsized businesses that big banks tend to ignore. Hungry for capital, its borrowers gladly accept relatively high interest rates.
As its name implies, PennantPark Floating Rate Capital's portfolio consists 100% of variable-rate debt instruments. Rates that have soared caused the average yield on debt investments to reach 12.4% during the company's fiscal third quarter ended June 30. That's a big increase over the 8.5% average yield it reported a year earlier.
It's generally a good thing for lenders to receive a higher interest rate from borrowers. Rates have risen so quickly, though, that investors are worried that some of PennantPark's borrowers won't be able to keep up.
The fear that rising interest rates will spur a wave of defaulting borrowers seems overblown. As of June 30, just 3 out of 130 portfolio companies were on non-accrual status. That's only one more company on non-accrual status than the company reported a year earlier.
PennantPark doesn't just lend money to every business that comes calling. It sticks to ones with private equity sponsors that generate enough cash to pay their bills.
The number of companies on non-accrual status is still low despite soaring interest payments, so the strategy appears to work well. Tucking some shares of this ultra-high-yield dividend payer into your portfolio now looks like a great way to boost your passive-income stream.
