Investors love dividend stocks, especially the ultra-high-yield variety because they offer a significant income stream and have massive total return potential. Total return includes interest, capital gains, dividends, and distributions realized over time. In other words, the total return on an investment or a portfolio consists of income and stock appreciation.
Let’s take a closer look at the concept of total return. Imagine you purchase a stock at $20 that offers a 3% dividend. If the stock price rises to $22 within a year, your total return is 13%. This is calculated by adding the 10% increase in stock price to the 3% dividend.
While the massive 50% rally of the past two years has been a bonanza for investors, many top Wall Street strategists are starting to tap the brakes on the long-running rally as price-to-earnings (P/E) metrics have risen way above normal levels. The current S&P 500 P/E ratio is 28.78, up almost 2% from the previous quarter and 15% from the prior year. Based on the latest S&P 500 monthly data, the market is overvalued by a range of 103% to 170%. This despite moves higher off the recent 10% corrections lows.
We decided to screen our 24/7 Wall St. ultra-high-yield dividend database, looking for stocks trading under the $10 level that offer dependable dividends. Three stocks appear to be tremendous values at present.
Why do we cover ultra-high-yield stocks?
While not suited for everybody, those trying to build strong passive income streams can do exceptionally well with some of these top companies in their portfolios. Paired with more conservative blue-chip dividend giants, investors can use a barbell approach to create significant passive income streams.
Barings BDC
This business development company is an industry leader. Barings BDC Inc. (NYSE: BBDC) is a publicly traded, externally managed investment company elected to be treated as a business development company under the Investment Company Act of 1940.
It seeks to invest primarily in:
- Senior secured loans
- First lien debt
- Unitranche
- Second lien debt
- Subordinated debt
- Equity co-investments
- Senior secured private debt investments in private middle-market companies operating across various industries
The company specializes in:
- Mezzanine
- Leveraged buyouts
- Management buyouts
- ESOPs
- Change of control transactions
- Acquisition financings
- Growth financing
- Recapitalizations in lower-middle market, mature, and later-stage companies
Barings BDC invests in manufacturing and distribution, business services and technology, transportation and logistics, and consumer products and services. It invests in the United States and companies with EBITDA of $10 million to $75 million, typically in private equity sponsor-backed investments.
Blackrock TCP Capital
Run by one of the most prominent money managers in the world. Blackrock TCP Capital Corp. (NASDAQ: TCPC) is a business development company specializing in direct equity and debt investments in:
- Middle-market, small businesses
- Debt securities
- Senior secured loans, junior loans, originated loans
- Mezzanine
- Senior debt instruments
- Bonds and secondary-market investments
It typically invests in:
- Communication services
- Public relations services
- Television
- Wireless telecommunication services
- Apparel
- Textile mills
- Restaurants retailing
- Energy, oil, and gas extraction
The company also prefers to invest in:
- Patent owners and Lessors
- Federal and Federally-Sponsored Credit Agencies
- Insurance, hospital, and healthcare centers
- Biotechnology
- Engineering services
- Heavy electrical equipment
- Tax accounting
- Scientific and related consulting services
- Charter freight air transportation
Blackrock TCP Capital also focuses on:
- Information technology consulting
- Application hosting services
- Software diagram and design
- Computer-aided design
- Communication equipment
- Electronics manufacturing equipment
- Computer components
- Chemicals
It seeks to invest in the United States. The fund typically invests between $10 million and $35 million in companies with enterprise values between $100 million and $1500 million, including complex situations. It prefers to make equity investments in companies for an ownership stake.
Uniti Group
Way off the radar, this specialty company offers solid total return potential. Uniti Group Inc. (NASDAQ: UNIT) is an independent, internally managed real estate investment trust (REIT) engaged in the acquisition, construction, and leasing of mission-critical infrastructure in the communications industry.
The company is principally focused on acquiring and constructing fiber optic, copper and coaxial broadband networks and data centers.
The company’s lines of business include:
- Uniti Leasing
- Uniti Fiber
Uniti Leasing acquires and constructs mission-critical communications assets, such as fiber, data centers, next-generation consumer broadband, coaxial, and upgradeable copper, and leases them back to anchor customers on an exclusive or shared-tenant basis.
Uniti Fiber provides infrastructure solutions, including cell site backhaul and small cell for wireless operators and Ethernet, wavelengths, and dark fiber for telecommunications carriers and enterprises. The company owns approximately 1,40,000 fiber network route miles.
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