There’s no beating around the bush: 2022 was an awful year for Wall Street and much of the investment community. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all entered a bear market and delivered their worst respective performances since 2008, with declines of 9%, 19%, and 33%.
But if there’s one investment strategy that tends to fare pretty well during a bear market, it’s buying dividend stocks. Companies that pay a dividend have demonstrated their ability to successfully navigate economic downturns, and they tend to be profitable on a recurring basis. Best of all, income stocks have a lengthy history of outperforming companies that don’t offer a dividend.
Arguably the biggest challenge for income investors is deciding what stock(s) to buy. While dividend stocks with supercharged yields can be tempting, investing risk tends to rise in tandem with yields. But that’s not the case with all ultra-high-yield dividend stocks — an arbitrary term I’m using to describe dividend stocks with yields of at least 7%.
What follows are three ultra-high-yield dividend stocks with yields of at least 10% that have the tools and intangible necessary to make you richer in 2023.
AGNC Investment: 12.77% yield
The first high-octane income stock that can put serious cash in investors’ pockets in the new year is mortgage real estate investment trust (REIT) AGNC Investment (AGNC 0.18%). AGNC is a monthly dividend payer that’s averaged a double-digit yield in all but one of the past 14 years.
The mortgage REIT operating model tends to be straightforward. These are businesses that seek to borrow money at low short-term lending rates, and use this capital to purchase higher-yielding long-term assets. As you may have guessed by the industry’s name (mortgage REIT), these long-term assets are mortgage-backed securities (MBS).
Last year, everything that could go wrong did go wrong for AGNC and its peers. With inflation soaring, the Federal Reserve was coerced into aggressively raising interest rates. This sent short-term borrowing costs substantially higher, as well as inverted the Treasury bond yield curve. The latter is bad news, because it reduces AGNC’s net interest margin, which is the average yield on the assets it owns minus its average borrowing rate.
Thankfully for AGNC and its investors, the new year should bring with it a more favorable operating environment. For example, the pace of interest rate increases by the nation’s central bank should slow dramatically during the first-half of 2023. More than likely, this’ll provide clarity on future monetary policy moves and reverse the inversion of the yield curve.
What’s more, even if interest rates remain higher than they’ve been over the past decade, it’ll ultimately boost the yields on the MBSs AGNC continues to add to its investment portfolio. Over time, higher MBS yields will provide a lift to the company’s net interest margin.
But most importantly, as I pointed out last week, the vast majority of AGNC’s $61.5 billion investment portfolio is tied up in agency securities. These are assets backed by the federal government in the event of a default. Having this default protection on its MBSs affords AGNC Investment the opportunity to use leverage to its advantage in order to maximize its profits.
Alliance Resource Partners: 10.02% yield
A second ultra-high-yield dividend stock with a double-digit yield that can make you a lot richer in 2023 is coal stock Alliance Resource Partners (ARLP 3.00%). Not a typo… I really did say “coal stock.”
Whereas nothing went right for mortgage REITs in 2022, everything has gone right for the coal industry following initial COVID-19 lockdowns in many developed countries. Since these initial lockdowns, capital investment in drilling, exploration, and energy infrastructure, has been subdued by virtually all global energy majors. This had made it difficult to increase worldwide oil and natural gas supply as demand perks up.
To add, Russia invaded Ukraine in February of last year. This invasion creates doubt about Europe’s oil and gas energy needs. With no clear way to quickly boost the global supply of crude oil and natural gas, coal has found itself back in the spotlight. Alliance Resource Partners benefited from a huge surge in per ton coal pricing in 2022, which should carry over into this year.
But it’s not just higher coal prices that are helping Alliance Resource Partners. The company’s management team has done a marvelous job of navigating choppy waters. Historically, the company has been conservative with its production expansion efforts, which is the reason its balance sheet offers more financial flexibility than its peers.
Furthermore, Alliance Resource Partners is regularly locking in volume and price commitments up to four years in advance. As of the end of September, the company had all of its production in 2022 spoken for (up to 35.9 million tons), with 32.9 million tons committed in 2023 and 22.8 million tons priced and committed in 2024. This high-margin commitments are what lead to predictable operating cash flow.
Alliance Resource Partners also generates oil and natural gas royalty revenue. The thesis here is very simple: If the price for these energy commodities remains elevated, segment adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is liable to climb.
With global energy complex dynamics very much working in its favor, Alliance Resource Partners is in solid shape for 2023.
Horizon Technology Finance Corp.: 10.68% yield
The third ultra-high-yield dividend stock with a 10%-plus yield that can make you richer in 2023 is business development company (BDC) Horizon Technology Finance Corp. (HRZN 0.32%). Like AGNC, Horizon doles out its dividend on a monthly basis, and it’s supported a double-digit yield for most of the trailing decade.
A BDC is a type of company that invests in small-cap and microcap businesses (often refereed to as “middle-market companies”). BDC’s come in two varieties: those that invest in common or preferred stock, and those that own debt. Horizon Technology Finance primarily falls into the latter category and invests in developmental-stage businesses involved in high-growth industries, such as life sciences and technology.
The obvious question you’re likely asking is, “Why hold debt in developmental businesses?” The simple answer is that unproven companies and start-ups have very limited access to debt and credit markets. By holding debt in these developmental companies, Horizon is able to net a well-above-average yield. As of the end of September, the company’s dollar-weighted annualized yield on its debt investments was a scorching 15.9%.
To build on the above, some of Horizon’s debt investment portfolio sports variable interest rates. With the Fed increasing interest rates at the fastest pace in four decades, Horizon is benefiting in the form of higher interest rates on the debt it holds. Between undertaking new investments and higher yields from variable-rate debt, total investment income jumped 42.1% year-over-year in the third quarter. This yield catalyst should continue in 2023.
Another reason to be excited about Horizon Technology Finance is the credit quality of its debt investment portfolio. As of September 30, just 2.9% of the company’s $609 million in debt investments at fair value were considered to be at an increased level of risk for a future loss of principal. That’s quite low for a BDC focused on unproven businesses.
If management continues to do its homework and remains diversified in its debt-investment approach, there’s no reason 2023 can’t be a profitable year for Horizon and its shareholders.