Two supercharged income stocks — sporting an average yield of 8.57% — have the necessary catalysts to make their patient investors richer.
For well over a century, the stock market has been making patient investors richer. While gold, real estate, and bonds, have all nominally increased investors’ principal over time, stocks offer the highest average annual return of all asset classes spanning the last century.
Although there are countless paths investors can take to grow their wealth on Wall Street, few have been as consistently successful as buying and holding top-tier dividend stocks.
Companies that dole out a dividend to their shareholders on a regular basis have often demonstrated that their operating model is time-tested. More importantly, these businesses are almost always recurringly profitable and fully capable of providing a clear growth outlook.
But what investors have come to appreciate most about dividend stocks is their historic outperformance of non-payers.
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In The Power of Dividends: Past, Present, and Future, the analysts at Hartford Funds collaborated with Ned Davis Research to compare the performance and volatility of dividend payers versus non-payers over a half century (1973-2023). Their analysis showed that income stocks more than doubled the annualized return of non-payers (9.17% vs. 4.27%), and did so with dividend payers being, on average, considerably less volatile.
However, there’s more to picking out a great dividend stock than just throwing a dart at a newspaper and hoping for the best. Statistically, risk and yield correlate. This means ultra-high-yield stocks — those with yields four or more times greater than the S&P 500‘s yield — can sometimes be trouble. But with proper vetting, income gems can be unearthed.
What follows are two ultra-high-yield dividend stocks — sporting an average yield of 8.57% — which income seekers can confidently buy in March.
Verizon Communications: 6.29% yield
The first supercharged income stock that has all the tools and intangibles needed to make patient investors richer in March and beyond is telecom stalwart Verizon Communications (VZ -2.28%), which is sporting a hearty 6.3% yield.
The biggest knock against Verizon is simply that it’s not a high-growth tech stock or knee-deep in artificial intelligence technology. Mature tech and telecom companies with low-single-digit growth rates like Verizon have been left in the dust in the current bull market rally.
The other potential concern for Verizon is the company’s debt-laden balance sheet. Big telecom companies regularly lean on debt to finance major infrastructure projects, acquisitions, and the purchase of spectrum. Following the Federal Reserve’s most-aggressive rate-hiking cycle in four decades, some investors are clearly worried about Verizon’s financial flexibility.
The good news is that Verizon is tackling both of these headwinds and looks to be a stronger company for it.
Though Verizon’s growth rate is never going to match that of the “Magnificent Seven,” it has made moves to increase its organic revenue growth. In addition to expanding the reach of its 5G wireless network, the company has emphasized consumer and enterprise broadband services.
Access to the internet may not be the growth story it was 25 years ago, but broadband customers do provide steady cash flow and are more likely to bundle with other high-margin services. The 12.3 million broadband connections Verizon closed out the fourth quarter with represents a 15% year-over-year increase.
Verizon’s balance sheet has also notably improved over the last two years. When 2022 came to a close, it was lugging around $130.6 billion in total unsecured debt. As of Dec. 31, 2024, this has been reduced to $117.9 billion. Make no mistake, work remains to be done. But the key point here is that Verizon’s financial flexibility is improving and its 6.3% dividend yield is perfectly safe.
The final piece of the puzzle for Verizon is its inexpensive valuation amid a historically pricey stock market. Whereas the S&P 500’s Shiller price-to-earnings (P/E) Ratio has only been this pricey three times in 154 years, Verizon’s forward P/E multiple is below 9.
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PennantPark Floating Rate Capital: 10.85% yield
The second ultra-high-yield dividend stock you can buy with confidence in March is off-the-radar business development company (BDC) PennantPark Floating Rate Capital (PFLT -1.42%). PennantPark doles out its dividend monthly and is currently sporting a yield that’s nearing 11%!
A BDC invests in the equity (common/preferred stock) and/or debt of middle-market companies — i.e., generally unproven small and microcap businesses. When PennantPark’s fiscal first quarter came to a close on Dec. 31, $1.964 billion of its $2.194 billion investment portfolio was devoted to debt investments, with the remainder in various common and preferred equity positions.
The reason PennantPark’s management team has skewed the company’s portfolio toward debt securities is straightforward: yield. Middle-market companies often lack access to basic financial services. When they are able to secure loans, they’re typically paying an above-average interest rate. PennantPark’s weighted average yield on debt investments clocked in at a mouthwatering 10.6% to close out 2024.
The prime catalyst fueling this high-octane weighted average yield on debt investments is interest rate variability. The entirety of PennantPark Floating Rate Capital’s debt portfolio sports variable rates. When the nation’s central bank raised interest rates from March 2022 through July 2023, it sent the company’s weighted average yield on debt investments notably higher.
Though the Fed is currently in the midst of a rate-easing cycle, which would be expected to lower PennantPark’s weighted average yield on debt investments over time, this step-down in rates is being undertaken slowly. With the Fed walking on eggshells, PennantPark has been able to meaningfully increase its debt-securities portfolio to take advantage of historically higher loan rates.
PennantPark’s loan-vetting team also deserves plenty of credit for protecting the company’s principal. Despite dealing with unproven businesses, only two companies were delinquent with their payments, as of Dec. 31, totaling a mere 0.4% of the portfolio’s total cost basis.
What’s more, inclusive of common and preferred equity, PennantPark has put capital to work in 159 companies. This works out to an average investment size of $13.8 million, which ensures that no single investment is capable of undermining the portfolio.
At less than 9 times forward-year earnings and trading right around book value, PennantPark Floating Rate Capital looks to be a smart buy for income seekers.