Buy These 5 Ultra-High-Yield Dividend Stocks to Create an Inflation-Crushing Portfolio – The Motley Fool

Your eyes aren’t deceiving you: Things are a lot pricier now than they were a year ago.

The U.S. Bureau of Labor Statistics announced that the Consumer Price Index for All Urban Consumers (CPI-U) rose 7.5% in January over the trailing-12-month period. That’s the fastest increase in the CPI-U since 1982, and it plainly shows that inflation is a problem. If you have cash sitting on the sidelines, it’s being devalued at its fastest pace in 40 years.

This is where dividend stocks can come in handy. Income stocks have significantly outperformed their peers that don’t pay dividends on an annualized basis over the long run. Additionally, dividend income can be used to somewhat or completely offset the effects of inflation.

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Of course, negating a 7.5% increase in prices isn’t easy. That’s where an ultra-high-yield dividend stock portfolio comes into play. The following five dividend stocks offer yields of at least 7% and can help income-seeking investors craft an inflation-crushing portfolio that averages an 8.7% yield.

Enterprise Products Partners: 7.62% yield

Some income seekers might be a bit gun-shy about putting their money to work in oil stocks after what happened during the pandemic. But the historic demand drawdown that pummeled upstream drillers and explorers had little effect on midstream giants like Enterprise Products Partners ( EPD 1.56% ).

Enterprise Products Partners is effectively an energy middleman. It controls around 50,000 miles of oil and gas transmission pipeline and has approximately 14 billion cubic feet of natural gas storage space. The beauty of this operating model is that the company signs fee-based contracts with upstream companies well in advance, which locks in highly predictable cash flow no matter how volatile crude oil or natural gas prices become.

As evidence of the safety of this operating model, Enterprise Products Partners’ distribution coverage ratio (i.e., the amount of distributable cash flow relative to what’s actually paid to shareholders) never fell below 1.6 during the height of the pandemic. A distribution coverage ratio below 1 would signify an unsustainable payout.

Enterprise Products Partners is working on a 23-year streak of increasing its base annual payout, making it as rock-solid of an income stock as you’ll find in the energy sector.

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PennantPark Floating Rate Capital: 8.78% yield

If you want something that’s completely off most income investors’ radars, the business development company (BDC) PennantPark Floating Rate Capital ( PFLT 0.08% ) is the ultra-high-yield dividend stock to consider buying. It’s also one of the highest-yielding monthly dividend payers.

PennantPark primarily invests in first-lien secured debt in middle-market companies — i.e., publicly traded companies with market valuations under $2 billion. It chose the middle-market arena because lending options for these smaller businesses tend to be limited. In other words, PennantPark nets juicy yields from the debt it holds.

Something else noteworthy about PennantPark is that 99% of its debt securities are of the variable-rate variety. When inflation spikes, the Federal Reserve usually responds by raising interest rates to cool things down. Rising interest rates will increase the variable rates attached to the debt PennantPark holds, thusly boosting its income.

As one final feather in the cap for this BDC, 108 of its 110 company-based investments are making their interest payments on time. Suffice it to say, PennantPark’s $0.095 monthly payout per share is very safe.

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AGNC Investment: 11.15% yield

Among monthly dividend payers, mortgage real estate investment trust (REIT) AGNC Investment ( AGNC -0.53% ) is on a pedestal. AGNC has doled out a double-digit dividend yield in 12 of the past 13 years, making it an ideal income stock to put inflation in its place.

While the prospect of rising interest rates could actually increase short-term borrowing costs for mortgage REITs and modestly weigh down their book value, the longer-term impact of the Fed’s monetary policy shift should be positive for AGNC. As lending rates rise, the yields AGNC nets from the mortgage-backed securities (MBS) it purchases are likely to climb, too. Over the long run, an expansion of the company’s net interest margin should be expected.

Another factor working in AGNC Investment’s favor is its affinity for purchasing agency securities. An agency asset is backed by the federal government in the unlikely event of a default. As you might imagine, this added protection does lower the yield AGNC can expect to receive on the MBS it buys. On the other hand, it also allows the company to safely deploy leverage to beef up its profit potential.

Since mortgage REITs often trade close to their respective book values, AGNC may be an absolute steal at 82% of its book value (as of Feb. 28). 

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Sabra Health Care REIT: 8.93% yield

A fourth ultra-high-yield dividend stock investors can buy to create an inflation-crushing portfolio is Sabra Health Care REIT ( SBRA -0.07% ). Sabra leases out well over 400 healthcare properties, such as skilled nursing facilities and senior housing communities.

As you can probably guess, Sabra Health Care was battered by the coronavirus pandemic. With COVID-19 disproportionately impacting senior citizens, there was genuine concern about the company’s lessees making their payments. The good news is that skilled nursing and senior housing occupancy rates both bottomed over a year ago. As a result, the company has collected 99.6% of its expected rents since the pandemic began.

Furthermore, the biggest gray cloud overhanging Sabra Health Care has been resolved. Avamere, which holds leases to 27 properties owned by Sabra, agreed to an amended master lease agreement last month.

Despite a tumultuous two years, it hasn’t stopped Sabra from investing in its future. Last year, the company put $419.4 million to work in new investments, with a weighted-average yield on those investments of a hearty 7.6%! Sabra is perfectly positioned to take advantage of America’s aging population. 

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Altria Group: 7.02% yield

The fifth and final ultra-high-yield dividend stock that can help investors trounce high inflation is tobacco giant Altria Group ( MO 0.60% ). Even though Altria’s share price has increased “only” 324% over the trailing 20 years, its total return, including dividends, is nearly 3,200% over this same period. That’s the power of dividends in action!

In one respect, the growth heyday for tobacco stocks has come and gone. A better understanding of the health effects of using tobacco has led to a significant decline in U.S. adult smoking rates over time. On the other hand, the tens of millions of remaining smokers have demonstrated a willingness to accept regular price hikes to keep their habit going. Despite a 7.5% decline in cigarette shipments in 2021, Altria recognized a considerably more modest drop of 1% in revenue from smokable products for the full year.  This exceptionally strong pricing power helps fuel its payout.

What’s more, Altria hasn’t been afraid to invest in its future. It has taken equity stakes in vape company Juul and Canadian cannabis stock Cronos Group, as well as investing heavily in heated tobacco and smokeless products. Though these remain small revenue channels for now, they offer sustainably faster growth potential than its legacy tobacco segment.

Tobacco might not be an exciting industry, but it’s paid shareholders handsomely for decades.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.