4 Ultra-High-Yield Dividend Stocks That Can Help You Crush Inflation

Your wallet isn’t playing tricks on you: Things really are costing an arm and a leg lately. In June 2022, the U.S. inflation rate spiked to 9.1%, which was its highest level in more than 40 years. Even with some modest tapering since the summer, the U.S. inflation rate in December came in at a still-painful 6.5%.

To make matters worse, the inflation rate is soaring at a time when the stock market is struggling. All three major U.S. stock indexes turned in their worst performances since 2008 last year. This has some folks questioning their resolve to stick around. Unfortunately, holding a lot of cash with a high inflation rate simply isn’t an attractive alternative.

A businessperson placing crisp $100 bills into two outstretched hands.

Image source: Getty Images.

The solution to both a high inflation rate and a volatile stock market might very well be to buy dividend stocks. Publicly traded companies that pay a regular dividend tend to be profitable and have transparent growth outlooks. More importantly, they have an extensive history of running circles around their non-paying peers over multiple decades.

Ideally, investors want a supercharged yield with minimal/no risk. However, studies have shown that risk and yield tend to correlate once yields hit 4% and above. In simple terms, high-yield stocks can come with added risks and may not be worth the trouble.

But that’s not always the case. The following four ultra-high-yield dividend stocks — a term I use to describe stocks yielding 7% and above — can help you crush the prevailing inflation rate and are ripe for the picking.

Enterprise Products Partners: 7.43% yield

The first high-octane income stock that can help you put inflation in its place is energy stock Enterprise Products Partners (EPD 0.87%). Though it’s the lowest-yielding stock on this list at 7.4%, Enterprise has increased its base annual distribution every year for a quarter of a century.

Enterprise Products Partners is a midstream oil and natural gas company. This means it acts as an energy middleman that transports and stores energy commodities and refined products. It operates more than 50,000 miles of transmission pipeline in the U.S., and can store 14 billion cubic feet of natural gas, along with 260 million barrels of oil, natural gas liquids, and refined products.

Whereas oil and gas drillers are directly exposed to the volatility of energy commodity price swings, Enterprise is predominantly shielded from spot-price volatility as a result of its contracts. In 2022, three-quarters of the company’s gross operating margin derived from fee-based contracts. These contracts allow management to accurately forecast the company’s operating cash flow in advance, which is crucial when it comes to outlaying capital for new infrastructure projects, acquisitions, and the company’s juicy distribution.

By the end of 2025, a dozen major infrastructure projects, with a total cost of approximately $5.8 billion, are slated to come on line. The added cash flow from these projects, coupled with a broken global energy supply chain that’s provided a healthy floor beneath the price of crude oil, is what makes Enterprise Products Partners such a no-brainer buy at roughly 10 times forward earnings.

Employees using tablets and laptops to analyze business metrics during a conference room meeting.

Image source: Getty Images.

PennantPark Floating Rate Capital: 10.97% yield

If completely under-the-radar ultra-high-yield dividend stocks are your thing, business development company (BDC) PennantPark Floating Rate Capital (PFLT -0.68%) is the stock to help you crush inflation. PennantPark is a monthly dividend payer that upped its distribution last week by 5%. The new payout equates to an 11% yield.

Although PennantPark holds nearly $153 million worth of common and preferred stock, it’s predominantly a debt-focused BDC for middle-market companies (those with market caps below $2 billion). This debt investment portfolio comes with three key advantages.

First of all, middle-market companies are usually unproven. This means their access to traditional debt and credit markets is limited. As a result, PennantPark receives higher yields on the debt it holds. As of Dec. 31, 2022, it was generating an average yield of 11.3% on its debt investment portfolio. 

Second — but arguably most important — PennantPark’s entire $998 million debt portfolio sports variable rates. With the Federal Reserve having no choice but to rapidly increase interest rates to tame historically high inflation, every rate hike means higher yields on the debt PennantPark is holding. Over the past five quarters, the average yield on its debt investments has catapulted from 7.4% to 11.3%.

And third, 99.9% of PennantPark’s debt is of the first-lien secured variety. If one of the companies it’s invested in were to seek bankruptcy protection, first-lien secured debtholders are first in line for repayment. The decision to buy first-lien secured debt helps to de-risk PennantPark Floating Rate Capital’s well-diversified debt portfolio.

Alliance Resource Partners: 13.02% yield

The third ultra-high-yield dividend stock that’ll have you trouncing the prevailing inflation rate is coal producer Alliance Resource Partners (ARLP -0.84%). Following yet another distribution increase, Alliance Resource Partners’ 13% yield is the high-water mark on this list, and double the U.S. inflation rate as of December 2022.

Although renewable energy investments have seemingly been all the rage for years, coal finds itself in the spotlight once more, thanks to the aforementioned broken energy supply chain. With European energy supply demand in question because of Russia’s invasion of Ukraine, and energy majors worldwide reducing their capital investments because of COVID-19, coal is admirably filling supply gaps. A higher per-ton sales price for coal is certainly helping Alliance Resource Partners.

Another reason it’s succeeding in an industry that was written off for dead is management’s smart decision to book production well in advance. Alliance Resource Partners expects to produce 36 million to 38 million tons of coal this year, and has 94% (at the midpoint) of this production already priced and committed. What’s more, 23.7 million tons is priced and committed for 2024. Locking this production in at favorable prices ensures healthy cash flow and the ability to pass along a robust distribution.

In addition to its coal assets, the company has been acquiring oil and natural gas royalty interests. If the price of oil and gas rises, and the number of oil-equivalent barrels sold increases, Alliance Resource should enjoy a healthy lift in earnings before interest, taxes, depreciation, and amortization (EBITDA) from its royalty segment.

Alliance Resource Partners is the cheapest ultra-high-yield stock on this list, with its shares valued at less than 4 times Wall Street’s forecast earnings in 2023 and 2024.

Innovative Industrial Properties: 8.16% yield

The fourth and final ultra-high-yield dividend stock that can help you crush inflation is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR 0.08%). IIP, as the company is more commonly known, has grown its quarterly distribution by 1,100% in less than six years.

IIP has had a rough start to the year after providing an update on its operating and investment activity in mid-January. After consistently collecting 100% of its rents on time in previous years, a couple of delinquencies have (pardon the pun) cropped up. As of Jan. 19, 2023, 92% of its rents for January were collected on time. This clearly has skeptics concerned about further delinquencies.

However, delinquencies are an inevitability for REITs. Innovative Industrial Properties operates a diversified portfolio, with no tenant accounting for more than 14% of the total portfolio, and no state representing more than 16% of its investments. It’s also working with its delinquent tenants to resolve any rental payment issues, which may include transferring leases to another party.

One of the core reasons it’s easy to get behind IIP as an investment is its lease structure. The entirety of Innovative Industrial Properties’ portfolio is triple-net leased (“NNN” leased). A triple-net lease requires the tenant to cover all property costs, such as maintenance, utilities, property taxes, and insurance. Although NNN leases result in lower monthly rental payments, the advantage is that this lease structure removes unexpected expenses from the equation. With relatively transparent cash flow and no significant debt maturities until May 2026, IIP is in better shape than most skeptics probably realize.

Finally, Innovative Industrial Properties is one of the few marijuana stocks that actually benefits from Capitol Hill’s lack of progress. Without legalization, pot companies have limited access to basic financial services. IIP has stepped in with its sale-leaseback program, which involves buying properties for cash and immediately leasing them back to the seller. As long as weed is illegal at the federal level, this program can continue to bring IIP new tenants.