Billionaires Are Buying These 2 Ultra-High Yield Dividend Stocks Hand Over Fist. Are They Smart Buys for Your Portfolio?

Investors looking for stocks that can produce heaps of passive income want to look at recent activity from some of the world's most successful investors. Billionaire hedge fund manager Ken Griffin more than tripled Citadel Advisors' position in Hercules Capital (HTGC 0.89%) during the last three months of 2023.

Hercules offers a yield that's more than six times the average dividend-paying stock in the benchmark S&P 500 index. It isn't the only ultra-high-yield stock that billionaires have been buying hand over fist, either. Israel Englander raised Millennium Management's bet on tobacco giant Altria Group (MO 0.78%) by 51% to more than 2.2 million shares in the fourth quarter of 2023.

Hercules Capital

Hercules Capital is a business development company (BDC) that lets everyday investors get in on the ground floor with innovative tech and life science businesses. Its investments include a mixed bag of successful companies, including Axsome Therapeutics, Palantir Technologies, and Transmedics Group.

Investors seeking passive income like to buy BDCs because these businesses don't have to pay income taxes as long as they return at least 90% of their earnings to shareholders as a dividend. Hercules offers a regular quarterly cash dividend of $0.40 per share, which works out to an 8.8% yield at recent prices.

A majority of Hercules Capital's assets are invested in debt structured with warrants, equity, and options. The value of such assets can be unpredictable so the BDC issues a supplemental dividend each year. The latest, announced in February, was for $0.32 per share, or $0.08 per share each quarter.

If we assume next year's supplemental payout is in line with this year's, the stock offers a 10.6% yield at recent prices. That said, the supplemental payout tends to fluctuate from year to year. Investors need to remember that some years will be better than others because many of this BDC's somewhat risky investments will lose money while others produce multibagger returns.

Altria Group

Income-seeking investors who are more interested in steady payout bumps than dividend increases want to look at Altria Group, the company that sells Marlboro in the U.S. market. Last August, the company raised its dividend payout for the 58th time in 54 years.

Altria's dividend payout has risen just 22.5% over the past five years, but it could still produce heaps of passive income. At recent prices, it offers a huge 9.5% yield.

Smoking has been in decline for decades, but recent losses are more severe than usual. Last year, the number of combustible cigarettes Altria sold fell by 9.9%. The stock offers an ultra-high yield because the market is nervous that strong competition from flavored e-vapor products like Elf Bar could make it impossible to keep profits rising.

Many fans of Elf Bar don't realize that the FDA banned flavored e-vapor products in 2020. Enforcement has been ineffective, but the government agency has accelerated its efforts in recent months. Last December, the FDA teamed up with Customs and Border Protection to seize 41 shipments of illicit e-vapor products. So far this year, the FDA has already issued warning letters to 61 brick-and-mortar retailers and 19 online retailers for selling illicit e-cigarettes.

Altria Group acquired NJOY in 2023, and it's one of just three e-cigarette brands with FDA marketing approval at the moment.

Despite the challenge from illicit flavored e-cigarettes, Altria Group reported adjusted earnings that rose 2.3% last year. With increased enforcement of the FDA's flavor ban and the rollout of NJOY under way, this legendary dividend payer could grow earnings by a mid-single-digit percentage in 2024 and for many more years to come.