In this article, we will take a detailed look at the Top 12 Ultra-High Yield Dividend Stocks to Buy. For a quick overview of such stocks, read our article Top 5 Ultra-High Yield Dividend Stocks to Buy.
Dividend investing is back in the limelight as investors seek stable income sources to protect their cash in inflation and market volatility. The Federal Reserve has clearly indicated that it's ready to wait a little longer before initiating rate cuts as inflation remains sticky. We recently talked about how analysts are calling dividend investing "critical" in the current environment. But there's a new debate around dividend yield vs dividend growth going on in dividend investing circles these days.
Dividend Investing When Rates are High
There's an interesting study published by ProShares in which the firm compared high-yield dividend stocks and dividend growth stocks to see how these two categories performed during high interest rate periods. The report found that dividend stocks with strong dividend growth history like Johnson & Johnson (NYSE:JNJ), Procter & Gamble Co (NYSE:PG) and Exxon Mobil Corp (NYSE:XOM) perform better than high-yield stocks when rates are high. The study analyzed dividend stocks with high yields as well as those with low yields but strong dividend growth history during the period between May 2005 through April 2015.
"Not only did the S&P 500 Dividend Aristocrats Index outperform the Dow Jones U.S. Select Dividend Index during the full period (May 2005-April 30, 2015), it also outperformed meaningfully during the period that interest rates increased. A specific example of this performance was the most recent extended spike in rates, which occurred during the “taper tantrum” between May 1 and August 20, 2013. During this period, rates on the 10-year Treasury rose from 1.63% to 2.81%, and the dividend growth index outperformed the high dividend yield index by approximately 200 basis points (bps)."
The Benefits of Investing in High-Yield Dividend Stocks
But not everyone agrees with the notion that you should always ignore high dividend yields. A famous investing strategy titled The Dogs of the Dow, propended by Michael B. O'Higgins, describes the benefits of investing in high-yield dividend stocks of the Dow. This strategy was analyzed in detail in a research thesis titled Which one is Better: Investing in High Dividend or Low Dividend Stocks? published in 2014 at University of Nevada, Reno. This research found out that high-yield dividend stocks indeed outperform low-yield dividend stocks. The research paper said:
"This analysis confirms that in the long run the high dividend portfolios performed better than the moderate and low dividend yield portfolios. The overall average return of Top Ten portfolios was over three times higher than overall average return of the low dividend yield portfolios and over 2% higher than the average return of the medium dividend yield portfolios. What’s more, the annual compound return of high dividend yield portfolio is more than nine times higher than the annual compound return of low dividend yield portfolio."
The power of compounding and dividend reinvestments has also made dividend investing attractive over the past few years. According to a report by Gateway Financial Advisors, dividends outperformed value and the broader S&P 500 index in the 10-year period ending 2019. The report said that dividend stocks returned about 14.7% in the period, compared to 12.1% return posted by value and 13% gains of S&P 500. The report also added that a hypothetical investment of $10,000 in dividends over this period of 10 years would have ballooned to $40,000, while the same investment in the broader market would have surged to $36,000. The report said that dividends were less "risky" in this period when compared to value stocks. Part of the reason for this is investors' tendency to shun value stocks and pour money into growth when interest rates are low. Growth clearly outperformed value as well as dividend stocks over the past decade, but the allure of regular dividend payments from income stocks kept dividend-paying companies on investors' radar despite near-zero interest rates.
Methodology
In this backdrop, it's important to see which ultra-high dividend yield stocks are currently bought by smart money investors. For this article we first used a stock screener to identify stocks with at least 10% dividend yield as of April 17. From these stock we chose 12 stocks with the highest number of hedge fund investors. Why do we pay attention to hedge fund sentiment of stocks? Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here).
Arbor Realty Trust Inc (NYSE:ABR) is one of the top ultra-high dividend stocks to buy according to hedge funds. In February Arbor Realty Trust Inc (NYSE:ABR) posted Q4 results. Adjusted EPS in the quarter came in at $0.54, beating estimates by $0.09. Revenue totaled $103.58 million, beating estimates by $5.93 million.
With a dividend yield of about 13%, FS KKR Capital Corp (NYSE:FSK) is one of the top ultra-high dividend yield stocks to buy according to hedge funds.
Of the 18 hedge funds that had stakes in FS KKR Capital Corp (NYSE:FSK) as of the end of the fourth quarter of this year, Israel Englander's Millennium Management which had a $15.6 million stake in FS KKR Capital Corp (NYSE:FSK).
Medical Properties Trust Inc (NYSE:MPW) shares recently soared after Medical Properties Trust Inc (NYSE:MPW) said it expects to surpass its initial target of $2 billion from liquidity transactions this year.
Unlike Johnson & Johnson (NYSE:JNJ), Procter & Gamble Co (NYSE:PG) and Exxon Mobil Corp (NYSE:XOM), MPW lacks impressive dividend growth history.
Miller Value Income Strategy stated the following regarding Medical Properties Trust, Inc. (NYSE:MPW) in its first quarter 2024 investor letter:
“When the Strategy is performing well and valuations in the portfolio remain as low as they are, we are hesitant to make many changes. However, remaining vigilant against investment mistakes and constantly searching for ways to improve the portfolio are both critical components of the process. This past quarter, we eliminated two mistakes and two winners that were approaching fair value. After Medical Properties Trust, Inc. (NYSE:MPW) announced yet another investment in a flailing tenant despite avowing to avoid the practice, we were forced to acknowledge our mistake and sell the stock.
In February, Evercore ISI gave an Outperform rating to NextEra Energy Partners LP (NYSE:NEP) with a $43 price target. Evercore said NextEra Energy Partners LP's (NYSE:NEP) simplification of strategy will bring down its capital costs and its cash flows from investment-grade counterparties will enable NextEra Energy Partners LP (NYSE:NEP) to meet its new 6% distribution growth target and support its debt obligations.
Of the 933 funds tracked by Insider Monkey, 18 hedge funds had stakes in NextEra Energy Partners LP (NYSE:NEP).
ClearBridge All Cap Value Strategy made the following comment about NextEra Energy Partners, LP (NYSE:NEP) in its Q3 2023 investor letter:
“Many businesses are threatened by a higher cost of capital, but one where reality has set in, and which also touches many other growth areas of the market, is the utility company NextEra Energy. Over the past few years, the company developed into a growth darling thanks to its strong track record in renewable energy development and tailwinds from the global energy transition and incentives in the Inflation Reduction Act. The problem for NextEra, and the transition broadly, is that this transformation is immensely capital intensive and many renewables projects offer lower returns on that capital. This requires high capital expenditures – often resulting in negative free cash flow – to meet the growth and financing needs of companies like NextEra. To help, the company leaned on financial engineering by using a publicly traded limited partnership called NextEra Energy Partners, LP (NYSE:NEP), providing further capacity for its parent to continue its development plans. NEP used layers of its own financial engineering to fund its own negative free cash flow and a large, growing dividend yield that we believe it could not sustain organically. Ultimately, the higher cost of debt from rising rates led NEP to lower its own growth ambitions, driving concerns about whether NextEra can execute on its extensive backlog. As a result, the stock has declined by approximately 30% year to date.”
Sustainable infrastructure company Atlantica Sustainable Infrastructure PLC (NASDAQ:AY) is one of the stocks with close to 10% dividend yield popular among the 933 hedge funds tracked by Insider Monkey.
Israel Englander's Millennium Management owns a $31 million stake in Atlantica Sustainable Infrastructure PLC (NASDAQ:AY).
Unlike Johnson & Johnson (NYSE:JNJ), Procter & Gamble Co (NYSE:PG) and Exxon Mobil Corp (NYSE:XOM), which have decades of dividend growth, Atlantica Sustainable Infrastructure is not a dividend king or aristocrat.
New York City-based REIT Chimera Investment Corporation (NYSE:CIM) ranks 7th in our list of the top ultra-high dividend yield stocks popular among hedge funds. While its dividend yield is close to 10% as of April 17, Chimera Investment Corporation's (NYSE:CIM) dividend history is not clean since it cut its dividend by 39% in the last quarter of 2023 to bring its payouts in line with its earnings trends.
Insider Monkey's database shows that 18 funds reported owning stakes in Chimera Investment Corporation (NYSE:CIM).
Starwood Property Trust Inc (NYSE:STWD) shares have gained about 7% over the past one year.
Out of the 933 hedge funds in Insider Monkey's database, 19 funds reported owning stakes in Starwood Property Trust Inc (NYSE:STWD) as of the end of 2023.
