Whether you are a new investor or a tenured investor, the last year has been a challenge. All three of his major U.S. stock indices have plunged into bear markets and had previously surged. NASDAQ Composite The hardest hit was the 33% decline.
But when things go bad on Wall Street, smart investors turn to dividend stocks. Companies that pay regular dividends to shareholders are almost always profitable through the test of time. In other words, the type of stocks you want to own in a bear market.
The most difficult task for income investors is figuring out what to buy. Ideally, investors want the highest possible yield with little or no risk. But research shows that risk and yield tend to go hand in hand when a company’s yield hits his 4%. Simply put, high-yield stocks require a lot of extra scrutiny to keep them out of the yield trap.
The good news is that there are reliable high-yielding stocks you can add to your portfolio today to weather the turbulent market. Here are three ultra-high-yielding dividend stocks that are clamoring to buy in 2023.
AGNC Investment: Yield 13.56%
The first ultra-dividend stocks you want to buy in the new year are mortgage real estate investment trusts (REITs) AGNC Investment (AGNC 2.17%)AGNC’s yield of about 13.6% is not a typo. Over the past 14 years, he has averaged double-digit yields for all but one year and pays dividends every month.
Mortgage REITs have some complex products (mortgage-backed securities (MBS)), but their operating models are easy to understand. Companies like AGNC borrow money at low short-term lending rates and use this money to buy high-yielding long-term MBS. A mortgage REIT’s goal is to get the highest possible yield on its assets and the lowest possible interest on what it borrows. The difference between the assets owned by AGNC and the borrowing rate is known as the net interest margin.
In 2022, things couldn’t get any worse for AGNC Investments and its peers. The Federal Reserve’s hawkish monetary policy has caused short-term borrowing rates to rise sharply, inverting the US Treasury yield curve. Simply put, AGNC’s book value and net interest margin were under severe pressure. In 2023, things should improve significantly.
For example, the yield curve spends most of its time on an upward slope. In other words, a bond with a longer maturity from now will yield a higher yield than a bond with a shorter maturity. Yield curve inversions should be minimized or even eliminated as the country’s central banks clarify following last year’s aggressive actions. This will be positive for AGNC’s net profit margin.
Rising interest rates have also pushed up yields on the MBS AGNC is buying. Over time, this should help boost the company’s net interest margin and potentially boost profits.
But the most important thing to note about AGNC is the composition of its $61.5 billion investment portfolio. All but $1.7 billion are tied to agency securities and backed by the federal government in the event of default. This additional protection will allow AGNC to deploy leverage to increase its profit potential.
PennantPark Floating Rate Capital: 10.18% Yield
The second ultra-high yield dividend stock to stand out as a scream buy for 2023 is a little-known business development company (BDC). PennantPark Floating Rate Capital (PFLT 0.36%)PennantPark is yielding double digits and analyzes monthly payments similar to AGNC.
Without getting too technical, a BDC is a company that invests in small-cap and micro-cap companies (also known as “mid-cap” companies) with valuations under $2 billion. BDCs typically focus on owning debt or equity. PennantPark stated that in his 2022 fiscal year (September 30, 2022) he held $154.5 million in common and preferred stock, while the remaining 87% of his investment portfolio was debt-bound. rice field. This makes it a BDC primarily focused on debt.
Why own mid-market debt? The answer is simple. Small businesses typically have no track record and limited access to credit markets, allowing BDCs like PennantPark to earn above-average yields on the debt they hold. At the end of September, the weighted average yield of fixed income investments in PennantPark’s investment portfolio was 10%!
Another important thing to understand about PennantPark Floating Rate Capital is that 99.99% of its debt is first secured. In the worst-case scenario, if one of its investments fails, the first mortgage debtor will be the first in line to pay. PennantPark’s investment portfolio is substantially de-risked as the company’s average investment is just $9.3 million (his $1.164 billion in 125 companies, including preferred and common stock).
But what makes this company so easy to buy in 2023 is the central bank’s hawkish monetary policy. His $1.01 billion debt investment in PennantPark is all floating rate. As the lending rate rises, so does the amount collected as a creditor. Over the past fiscal year, the weighted average yield on debt investments rose 260 basis points to his aforementioned 10%. This figure he expects to rise again in 2023.
Enterprise Product Partners: 7.71% Yield
Energy stocks are the third super-high-yielding dividend stocks to buy in 2023 Enterprise Product Partner (EPD 1.50%)Despite yielding “just” 7.71%, Enterprise has increased its base annual dividend for 24 consecutive years.
Unsurprisingly, some investors may be hesitant to invest money in oil and gas stocks, especially given what happened in 2020. The initial lockdowns associated with the COVID-19 pandemic sparked demand, driving oil and gas spot prices down. cliff. Thankfully, this is nothing Enterprise Products Partners shareholders need to worry about.
Enterprise is one of the leading midstream operators in the United States. Midstream energy companies are effectively energy brokers charged with moving, storing, or processing crude oil, natural gas, natural gas liquids, and refined products.
Long-term contract structures make midstream oil and gas stocks highly desirable for income investors. Companies tend to rely on fixed-fee contracts that generate highly predictable cash flows and eliminate spot price volatility from the equation. It is important to be able to accurately forecast annual cash flows. This allows the company to spend capital on acquisitions and new projects without compromising profitability.
Another reason investors can confidently buy an Enterprise Product Partner in 2023 is the state of the global energy sector. Over the past three years, the industry has endured pandemic-related underinvestment. Russia’s invasion of Ukraine last year has added to uncertainty in Europe’s short- and long-term supply. In other words, there are not many viable ways to rapidly increase global production of crude oil and natural gas. This is positive for spot prices of crude oil and natural gas, which could encourage an increase in domestic production. In short, this is an open invitation for Enterprise Product Partners to enter into additional long-term agreements.
Currently valued at less than 10x Wall Street’s 2023 earnings projections, Enterprise Products Partners stands out as a solid deal among high-octane income stocks.