Investors have been facing an uphill climb since the first week of 2022. After hitting their respective all-time closing highs, the timeless Dow Jones Industrial Average and broad-based S&P 500 shed as much as 19% and 24%, respectively, of their value. You’ll note the S&P 500’s tumble officially placed the index in a bear market.
Although bear markets can test the resolve of investors due to the velocity and unpredictability of their downside moves, they’re also, historically, the perfect time to put your money to work. That’s because every bear market and correction throughout history in the S&P 500 has eventually been cleared away by a bull market.
It’s a particularly smart time to go shopping for dividend stocks. Companies that pay a regular dividend are almost always profitable and time-tested. Further, a study released by JPMorgan Asset Management in 2013 showed that income stocks have vastly outperformed non-dividend payers over the long run (a 40-year period).
Of course, no two dividend stocks are created equally. In an ideal world, income seekers would receive the highest yield possible with the least amount of risk. Unfortunately, data shows that risk and yield tend to correlate once you hit high-yield status (a yield of 4% or above). In other words, stocks with higher yields can be more trouble than they’re worth.
But this isn’t always the case. The following three ultra-high-yield dividend stocks — i.e., those with yields of 7% or higher — are attractively priced and can confidently be bought hand over fist in August by opportunistic income seekers.
Enterprise Products Partners: 7.1% yield
The first ultra-high-yield dividend stock begging to be bought in August is oil and gas company Enterprise Products Partners (NYSE: EPD). The company is currently paying a hardy 7.1% yield and has increased its base annual payout in each of the past 23 years.
In recent years, income investors often shudder when oil stocks become the topic of discussion because oil and gas demand fell off a cliff during the initial stages of the COVID-19 pandemic. This absolutely clobbered drilling and exploration companies. However, Enterprise Products Partners didn’t even flinch as oil and gas prices gyrated.
What makes this ultra-high-yield stock unique is its role in the U.S. energy complex. Enterprise Products Partners is a midstream provider. Effectively, it’s a middleman that operates more than 50,000 miles of transmission pipeline, 14 billion cubic feet of natural gas storage space, 19 deepwater docks, and 24 natural gas processing facilities. Midstream companies almost always utilize fixed-fee or volume-based contracts with drilling companies, so their operating cash flow is highly predictable, even if oil and gas prices aren’t.
Enterprise Products Partners is also perfectly positioned to benefit from energy commodity prices remaining elevated for a lengthy period of time. The combination of reduced capital investment by drillers during the pandemic and Russia’s invasion of Ukraine has unquestionably challenged the global supply of oil and natural gas.
Boosting production isn’t going to happen overnight. This creates a scenario where elevated prices could entice U.S. shale drillers to up their output over time, and that means even greater need for midstream energy infrastructure.
For those of you who need even more convincing, consider that Enterprise Products Partners’ distribution coverage ratio (DCR) has been 1.6 or higher throughout the pandemic. The DCR is a measure of distributable cash flow from operations relative to what was paid to the company’s shareholders. If this figure was at or below 1, there would be a reason to worry. Enterprise Products Partners’ payout is rock solid.
Alliance Resource Partners: 7% yield
The second ultra-high-yield dividend stock that can be confidently bought hand over fist by income seekers in August is Appalachia-focused coal producer Alliance Resource Partners (NASDAQ: ARLP). The company is sporting a fresh 7% yield after announcing a 14.3% quarterly dividend hike on Monday, Aug. 1, 2022.
As with oil stocks, the idea of investing in a coal stock for income might sound a bit risky. After all, energy commodities were taken to the woodshed during the COVID-19 pandemic. Since most coal companies were highly levered prior to the pandemic, and many developed countries have been pushing for cleaner energy solutions, coal producers entered the pandemic in poor financial shape.
However, Alliance Resource Partners has consistently shown it’s the exception to the rule. The company’s management team has approached production expansion and acquisitions conservatively. The end result is a flexible balance sheet that has in the neighborhood of $320 million in net debt and a low debt-to-equity ratio, relative to its peers.
Another reason Alliance Resource Partners is such a success is its ability to lock in volume and price commitments well in advance. As of the end of June, the company had virtually all (35.2 million tons) of its 35.5 million tons to 37 million tons of production in 2022 spoken for.
But what’s impressive is that 29 million tons of domestic and export production is already committed and priced for 2023. In fact, nearly 25 million tons of coal was locked in through 2025 during just the second quarter — much of it at a higher per-ton price than previously anticipated. This leads to highly predictable cash flow and the ability for Alliance Resource Partners’ management team to expand annual production by 1 million tons in 2023.
In addition to its foundational coal assets, Alliance Resource Partners owns oil and gas royalties. Very simply, if the price for oil and natural gas rises, so should the royalty payment the company receives. Based on the factors discussed with Enterprise Products Partners, it’s no surprise that oil and gas segment earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 125% in the June-ended quarter from the prior-year period.
As one final note, management has previously stated its intent to raise the company’s dividend by 10% to 15% each quarter throughout 2022.
AGNC Investment Corp.: 11.4% yield
The third and final ultra-high-yield dividend stock to buy hand over fist in August is mortgage real estate investment trust (REIT) AGNC Investment Corp. (NASDAQ: AGNC). The company is the highest-yielding stock on this list at 11.4% and has averaged a double-digit yield in 12 of the past 13 years.
A mortgage REIT is a company that borrows money at the lowest short-term rate possible and uses this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The greater the difference (known as net interest margin) between the yield it receives from the MBS it’s purchased minus the short-term borrowing rate, the more profitable the mortgage REIT.
What makes mortgage REITs so attractive for income investors is the predictability of the industry. If investors keep a close eye on Federal Reserve monetary policy and the interest-rate yield curve, they’ll have all the information they need to know about how well or poorly the mortgage-REIT industry is performing.
At the moment, things are especially challenging for AGNC Investment. The yield curve has flattened and even inverted on a couple of occasions. Additionally, the Fed is rapidly increasing interest rates to tame inflation, which is increasing short-term borrowing costs.
However, when things look their bleakest, it’s often the perfect time to buy mortgage REITs like AGNC. For example, even though short-term borrowing costs are rising, higher interest rates will also lift the yields on the MBS that AGNC is purchasing. Over time, this should have a net-positive impact on its net interest margin.
To add to the above, the interest-rate yield curve spends a disproportionate amount of time steepening than it does flattening because the U.S. economy spends far more time growing than contracting. These are conditions that favor patient investors.
Another factor working in AGNC Investment’s favor is that it almost exclusively invests in agency assets. An “agency” security is backed by the federal government in the unlikely event of a default. With this added protection, AGNC can use leverage to its advantage in order to increase its profits.
With an 11.4% yield, AGNC investors can double their money with reinvestment from the dividend alone in about 6.3 years.