Nasdaq bear market: 3 ultra-high yielding dividend stocks you’ll regret not buying on the downside

Ihe start of the year was difficult for investors. After reveling in the strongest rebound ever since a bear market low (March 2020), the three major US indices have moved into correction territory. Both the wide base S&P500 and iconic Dow Jones Industrial Average declined by double-digit percentages, while dependent growth Nasdaq Compound (NASDAQ INDEX: ^IXIC) officially dipped into bearish territory with a maximum decline of 22%.

While stock market declines can be scary in the sense that they happen quickly and often without warning, they are also the perfect time to put your money to good use. Keep in mind that every correction and bear market in history, including for the more volatile Nasdaq Composite, was eventually erased by a bull rally.

In other words, a bear market is no reason to hide. This is the perfect time to go on the offensive. The simple question is: which stocks to buy?

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Focusing on very high yielding dividend stocks can be a winning strategy

While there are a number of strategies that can make investors rich, buying dividend stocks is a proven plan to make money.

In 2013, JP Morgan Asset Management, a division of money-center bank JPMorgan Chase, published a report comparing the performance of companies that launched and increased their dividends with those of stocks that did not pay dividends over a 40-year period (1972-2012). Dividend stocks have absolutely crushed non-dividend payers during this period, with an average annual return of 9.5%, compared to a 1.6% annualized increase for non-dividend stocks.

While the magnitude of the outperformance may be surprising, the end result – with dividend-paying stocks offering higher annualized returns than non-dividend stocks – is not in the least bit shocking. Companies that pay dividends are often profitable, proven, and have clear long-term prospects.

The biggest challenge for income-oriented investors is balancing return and risk. Studies have shown that once returns hit around 4%, risk and reward tend to be more correlated. Fortunately, not all high-yielding or ultra-high-yielding stocks (companies that I arbitrarily define as having returns of 7% or more) are bad news.

The Nasdaq Composite’s recent plunge into a bear market is the perfect opportunity to buy this trio of declining ultra-high yielding dividend stocks.

Growing stacks of coins placed in front of a two story house.

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AGNC Investment Corp. : yield of 10.92%

The first ultra-high-income stock you’ll regret not buying during this pullback is the mortgage real estate investment trust (REIT). AGNC Investment Corp. (NASDAQ: AGNC). AGNC has averaged double-digit returns for 12 of the past 13 years and distributes its dividend on a monthly basis.

Without getting too deep into the weeds, mortgage REITs like AGNC borrow money at low short-term rates and use that capital to buy higher-yielding long-term assets, such as mortgage-backed securities. (MBS) – therefore “mortgage REITs”. AGNC’s goal, and that of its industry peers, is to maximize their net interest margin (NIM), which is the average annual return on MBS and other investments minus the average short-term borrowing rate. term.

At the moment, AGNC faces an uphill battle. A flattening yield curve, where the spread between short-term and long-term Treasury yields narrows, generally means a weaker NIM. However, the Federal Reserve’s hawkish monetary policy is also expected to boost returns from future MBS purchases. This means that the AGNC should be rewarded with a significant expansion of the NIM in the years to come.

Another thing to note is that AGNC almost exclusively buys agency securities – $79.7 billion of its $82 billion investment portfolio is made up of agency assets. A security agency is backed by the federal government in the event of default. While this added protection weighs on returns from MBS AGNC purchases, it also allows the company to deploy leverage to its advantage.

Given that most mortgage REITs remain close to their respective book values, AGNC’s 16% discount to tangible book value, along with its 21% decline in stock price over the past five months, in make them an ideal candidate to buy on the downside.

Employees using tablets and laptops to analyze business metrics in a meeting.

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PennantPark Floating Rate Principal: 8.69% yield

Another ultra-high-yielding dividend stock you’ll regret not buying during the Nasdaq bear market decline is the Business Development Company (BDC). PennantPark Floating Rate Capital (NASDAQ: PFLT). Interestingly, PennantPark, like AGNC, also pays out its deliciously high dividend on a monthly basis.

PennantPark’s operating model is quite simple. It mainly acquires senior secured debt securities for middle market companies and sprinkles other equity investments, such as preferred stocks. In this case, mid-market companies refer to publicly traded companies with a market capitalization of $2 billion or less.

The reason this BDC has chosen to focus on middle market companies is the return it can generate on senior secured debt. Since most small and micro cap companies are unproven, their lending options tend to be limited. This allows PennantPark to earn an average return on its debt investments of 7.5%.

Investors should also be excited about the type of debt securities PennantPark holds in its portfolio. According to the company’s year-end report, 99.9% of its debt investments were floating rate. With the Federal Reserve recently estimating that lending rates could rise up to seven times in 2022 to curb rapidly rising inflation, PennantPark looks poised for a massive revenue windfall.

But perhaps most importantly, the company doesn’t have many delinquency issues. At the end of the year, only 2.5% of the company’s portfolio was unaccounted for (on a fair value basis), and more than 98% of its other investments in the company were paying on time.

PennantPark Floating Rate Capital is the perfect off-the-radar income stock to buy on any dip.

Ben Franklin's eyes peering under a disorderly pile of hundred dollar bills.

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Icahn Enterprises: 15.6% return

The third ultra-high-yielding dividend stock you’ll regret not buying on the downside is Icahn Enterprises (NASDAQ: IEP), the most productive on this list. Icahn Enterprises has been distributing a quarterly distribution for nearly 17 years and currently boasts a jaw-dropping 15.6% yield.

The “why buy Icahn Enterprises?” argument can be broken down into two main drivers. The first is in the name of the company. Carl “Icahn” is the founder of this diversified holding company and remains the chairman of its board of directors.

Icahn is one of the most well-known activist investors in the world. An activist investor typically buys a single-digit percentage stake in a company over a short period of time with the goal of effecting change that benefits shareholders (including the activist investor). Activist investors often seek a seat or two on the board of a struggling company and fight for specific actions, such as selling non-core assets, cutting costs, or perhaps buying out shares. The fact is, activist investors most often have a positive impact on a company’s valuation.

The other thing investors should really like about Icahn Enterprises is its cyclical ties. Although it is a diversified holding company, a large percentage of its non-investment segment is related to the energy and automotive industries. Although recessions are an inevitable part of the business cycle, periods of expansion last significantly longer than recessions. As such, the Icahn Enterprises portfolio is perfectly positioned to benefit from the natural expansion of the US and global economy over time.

With shares of the company down 12% since early November, now is the perfect time for opportunistic income investors to pounce.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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