One of the best aspects about putting your money to work on Wall Street is that you have the ability to chart your own path to financial freedom. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, there is no one-size-fits-all strategy that you’ll have to stick to.

But among these seemingly countless ways to grow your wealth on Wall Street, few can hold a candle to the long-term returns delivered by dividend stocks.

Companies that dole out a dividend to their shareholders on a regular basis tend to be recurringly profitable and time-tested. More importantly, they’re almost always capable of providing transparent long-term growth outlooks — and Wall Street loves transparency.

In The Power of Dividends: Past, Present, and Future, the investment advisors at Hartford Funds, in collaboration with Ned Davis Research, compared the performance of income stocks to non-payers over the last half-century (1973-2023). What they found was that dividend stocks have more than doubled than average annual return of non-payers (9.17% vs. 4.27%), and did so while being less volatile than the benchmark S&P 500.

Ideally, investors want the highest yield possible with the least amount of risk. However, studies have shown that ultra-high-yield dividend stocks — those with yields that are at least four times higher than the yield of the S&P 500 — can sometimes be more trouble than they’re worth. But with extra vetting, high-octane gems can be uncovered.

What follows are three superb ultra-high-yield dividend stocks, all with yields north of 10%, which can confidently be added to income seekers’ portfolios right now.

Annaly Capital Management: 12.8% yield

The first supercharged dividend stock that makes for a no-brainer buy is mortgage real estate investment trust (REIT) Annaly Capital Management (NYSE: NLY). Annaly has declared $26 billion in dividends since its initial public offering in 1997, and it’s averaged around a 10% yield over the last two decades.

Over the past couple of years, there’s probably not an industry Wall Street has disliked more than mortgage REITs. These are companies that are highly sensitive to changes in interest rates. The fastest rate-hiking cycle by the Federal Reserve since the early 1980s, which kicked off in March 2022, sent short-term borrowing costs soaring. In turn, this shrunk the net interest margin for mortgage REITs, including Annaly.

However, mortgage REITs have historically performed their best in a declining-rate environment. The nation’s central bank has officially shifted to a rate-easing cycle, which is expected to reduce short-term borrowing costs. At the same time, the average yield Annaly Capital Management is netting from the mortgage-backed securities (MBS) in its portfolio will have risen. In short, this is a recipe for expanding net interest margin.

Story continues

Another reason Annaly can thrive is because the Fed is no longer in its backyard, per se. At one point, the nation’s central bank was purchasing MBSs to stabilize the mortgage market. But in doing so, it reduced opportunities for Annaly to nab lucrative MBSs for its own portfolio. With yields on MBSs having risen since March 2022 and short-term borrowing costs on the decline, Annaly has a clearer path to high value assets without the Fed buying MBSs..

Lastly, Annaly Capital Management predominantly invests in agency assets. An “agency” security is backed by the federal government in the event of default on the underlying asset. This extra protection allows Annaly to lever its investments in order to pump up its profit potential.

PennantPark Floating Rate Capital: 10.4% yield

The second magnificent ultra-high-yield dividend stock that can be bought with confidence right now is little-known business development company (BDC) PennantPark Floating Rate Capital (NYSE: PFLT). PennantPark dishes out its dividend on a monthly basis and is currently sporting a rock-solid 10.4% yield.

BDCs are businesses that invest in the debt and/or equity (common and preferred stock) of middle-market companies, which are generally unproven small- and micro-cap enterprises. Although PennantPark’s management team is overseeing close to $209 million in various common and preferred equity positions, the bulk of the company’s portfolio — $1.45 billion — is tied up in first-lien secured debt.

There are a few clear-cut advantages to being a debt-focused BDC. To begin with, most middle-market companies lack access to basic financial services. Without access to traditional lending channels, PennantPark is reaping the rewards of a market-topping yield on the loans it holds.

Additionally, as the company’s name implies, the entirety of PennantPark Floating Rate Capital’s debt-securities portfolio is variable rate. This is to say that rates rise and fall in lockstep with the Fed’s monetary policy actions. Since September 2021, the company’s weighted average yield on debt investments has surged from 7.4% to 12.1%, as of June 30, 2024.

Don’t overlook the steps management has taken to protect the company’s principal, either. For instance, 99.9% of its loan portfolio is first-lien secured debt. This class of debtholders is first in line for repayment in the event of default.

What’s more, PennantPark has spread its $1.66 billion portfolio, including equity investments, across 151 companies. An average investment size of $11 million ensures that no one company is critical for success or capable of upending the ship.

Alliance Resource Partners: 11.2% yield

A third superb ultra-high-yield dividend stock that makes for a no-brainer buy right now is energy stock Alliance Resource Partners (NASDAQ: ARLP).

Entering this decade, coal producers like Alliance Resource Partners were effectively left for dead. Clean-energy solutions, such as wind and solar, were expected to put coal into the rearview mirror. However, the COVID-19 pandemic had other plans. Years of capital underinvestment by energy majors due to demand uncertainty during the pandemic opened the door for coal companies to fill the supply gap. The end result has been historically strong pricing power for coal producers.

But Alliance Resource Partners has taken things one step further. The company is using this advantageous per-ton selling price to lock in volume commitments up to four years in advance. As of the company’s second-quarter operating report, it had 96% of the midpoint of its 2024 sales guidance (34 tons) priced and committed this year, as well as 49% for next year. It’s easy to sustain an outsized yield when operating cash flow is highly predictable.

Management also deserves credit for a historically conservative approach to expansion. Rather than digging itself deep into debt like many of its peers, Alliance Resource has slow-stepped its production expansion and been mindful of its borrowing. It closed out the midpoint of 2024 with less than $188 million in net debt, which is a reasonably low figure for a company that generated $755 million in operating cash flow over the trailing-12-month period.

Lastly, Alliance Resource Partners has, in recent years, diversified its operations to include oil and natural gas royalties. If the spot price of these energy commodities climbs, Alliance Resource should benefit from an increase in earnings before interest, taxes, depreciation, and amortization (EBITDA). Years of capital underinvestment tied to COVID-19 have tightened the global supply of oil and provided a lift to its spot price, which is a perfect scenario for Alliance Resource Partners’ royalty segment.

Should you invest $1,000 in Annaly Capital Management right now?

Before you buy stock in Annaly Capital Management, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Annaly Capital Management wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $845,679!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of October 21, 2024

Sean Williams has positions in Annaly Capital Management and PennantPark Floating Rate Capital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

3 Superb Ultra-High-Yield Dividend Stocks With Yields North of 10% That Make for No-Brainer Buys Right Now was originally published by The Motley Fool