When a commercial aircraft encounters turbulence, a flight attendant will tell all passengers to return to their seats and buckle their seat belts. Some investors think a similar approach is appropriate when the stock market hits a rough patch. They hunker down.
I have a different strategy. Instead of staying on the sidelines, I like to put my money to work when the stock market is bumpy. Here’s why I recently bought these three ultra-high-yield dividend stocks amid the current choppiness.
1. Ares Capital
I won’t deny that Ares Capital‘s (ARCC -1.25%) dividend ranks at the top of the list of the reasons I just added to my position in the stock. But with the business development company (BDC) offering an ultra-high forward yield of 8.6% at the current share price, who can blame me?
The reality is that even if Ares Capital’s share price goes nowhere, I’ll still enjoy a pretty good return thanks to the dividend alone. Of course, I’m betting the company won’t cut its payouts. However, that’s a pretty safe wager considering that it has paid a stable or growing dividend for 15 consecutive years.
I think Ares Capital’s share price will rise over time, though. The stock’s total cumulative return since the company’s founding in 2004 is a whopping 70% higher than the S&P 500‘s total return. That outperformance isn’t because BDCs in general have been huge winners, either. Ares Capital’s total cumulative return during the period was also three times higher than the S&P BDC Index.
How has Ares Capital been able to achieve this success? There is significant and growing demand for the financing alternatives it provides to middle-market businesses. As the largest publicly traded BDC, Ares Capital has more potential deals to evaluate. That allows it to be highly selective and only close the ones most likely to deliver acceptable returns on investment.
2. Energy Transfer
Energy Transfer‘s (ET -0.85%) business of operating more than 130,000 miles of pipelines that transport crude oil, natural gas, and natural gas liquids is much different from Ares Capital’s. However, the two companies share at least one thing in common: They both return a lot of money to their investors.
As a limited partnership (LP), Energy Transfer’s “dividends” are referred to as distributions. No matter what you call them, though, they’re attractive. At its current share price, the midstream leader’s forward distribution yield is 6.9%. Management also expects to increase its distribution by 3% to 5% per year.
I like that Energy Transfer’s fortunes don’t hinge on the sometimes wildly volatile prices of oil and natural gas. Its toll-road-like business model generates reliable cash flow to fund its distributions and reinvest in growth.
But can a company embedded at the heart of the fossil fuel industry deliver solid growth? I think so. U.S. demand for natural gas continues to grow, thanks in part to the artificial intelligence (AI) tailwind spurring the construction of new energy-hungry data centers. Energy Transfer is well positioned to capitalize on this demand, as it has multiple new projects underway and a solid history of completing smart acquisitions.
3. Pfizer
Pfizer‘s (PFE 0.72%) forward dividend yield of 6.7% is one of the highest to be found in the healthcare sector. That gives the big pharmaceutical company a nice head start toward delivering strong total returns.
Granted, Pfizer’s dividend yield is high because its share price has fallen significantly in recent years. This dismal performance was primarily the result of sharply declining COVID-19 product sales and the company’s looming loss of patent exclusivity for several of its products. But I’m optimistic about where Pfizer is headed.
The worst sales declines seem to be over for the company’s COVID-19 franchise. And while Pfizer faces a patent cliff, it has multiple newer products that should be able to generate enough sales growth to more than offset any revenue losses from the products that will face generic and biosimilar competition.
Pfizer’s shares trade at roughly 8.7 times forward earnings. The stock looks even cheaper when you factor in its growth prospects: Its price/earnings-to-growth (PEG) ratio is a low 0.61, according to LSEG. I think this valuation indicates that all the challenges Pfizer faces are more than baked into its share price. This ultra-high-yield dividend stock should have brighter days ahead, in my view.
Keith Speights has positions in Ares Capital, Energy Transfer, and Pfizer. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.
