Dividend Stocks: 2 to Load Up On Now and 1 to Avoid

John Smith

Dividend stocks remain a cornerstone investment for many portfolios, providing steady income along with capital appreciation potential. While not all dividend payers are created equal, we’ve identified two ultra-high yield stocks that investors should consider loading up on now, along with one high-yielding name that is flashing warning signs.

Alliance Resource Partners: Coal Leader Offering 12.47% Yield

Alliance Resource Partners L.P. (NASDAQ: ARLP) is a diversified natural resource company and a leader in the thermal coal industry. The stock offers investors a whopping 12.47% distribution yield, providing substantial income.

Alliance Resource operates four coal mining segments: Illinois Basin Coal Operations, Appalachia Coal Operations, Oil and Gas Royalties, and Coal Royalties. The company produces a range of thermal and metallurgical coal and has seven underground mining complexes located across several states including Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia.

In addition to coal mining, Alliance Resource leases a coal loading terminal on the Ohio River, buys and resells coal, and holds mineral and royalty interests in over 1.5 million acres of oil and gas producing regions like the Permian and Williston Basins. The company also provides mining technology products including data networks, tracking systems, collision avoidance systems, and analytics software.

With its diversified coal operations and high distribution yield north of 12%, Alliance Resource offers income investors a compelling opportunity in the energy sector. Coal demand remains strong globally even amid the transition to cleaner energy.

FS KKR Capital: A Business Development Company Paying 14.18%

For investors seeking sky-high yields, FS KKR Capital Corp. (NASDAQ: FSK) is a business development company that merits attention. FS KKR invests primarily in private credit markets, focusing on loans, bonds, and equity interests in private companies.

Specifically, the company targets first-lien and second-lien senior secured loans, subordinated debt, warrants, and minority equity positions through primary and secondary market purchases. This differentiated strategy provides exposure to an attractive segment of the private credit universe.

FS KKR recently posted strong quarterly results, including net investment income per share of $0.73 which beat estimates by $0.05. The company also announced an additional $500 million stock repurchase program, which demonstrates its financial strength.

With shares trading at an attractive entry point and a mammoth 14.18% dividend yield, FS KKR is poised to deliver substantial income and upside potential ahead.

AGNC Investment: Caution Advised Despite 17.26% Dividend

While eye-popping yields may seem appealing, investors should dig deeper before jumping aboard. Case in point is AGNC Investment Corp. (NASDAQ: AGNC), a residential mortgage REIT with a distribution yield of 17.26%.

AGNC invests in government-backed residential mortgage securities, using leverage through repurchase agreements to amplify returns. However, this leverage can also magnify losses when interest rates rise or real estate falters.

And that’s exactly what has transpired in 2022. AGNC’s book value per share has declined 24% year-to-date as the Fed’s rate hikes slammed mortgage securities. The stock price sits 33% below its 52-week high as a result.

Making matters worse, almost 6% of the outstanding shares are sold short as bearish traders target the struggling mortgage REIT. Should the housing market and AGNC’s income continue to deteriorate, a distribution cut may be on the horizon.

While the 17%+ yield seems tempting, AGNC Investment comes with substantial risk. Investors may be better served looking elsewhere for high income opportunities.

Bond Market Signals Growing Recession Risk

Beyond individual stock picks, broader economic trends also warrant investor attention. The bond market in particular is flashing increasing warning signs of an impending recession.

The yield curve has substantially inverted in 2022, meaning short-term Treasury yields now exceed long-term yields. Historically, prolonged yield curve inversions have preceded every U.S. recession since the 1950s.

Additionally, credit spreads have widened significantly this year. The option-adjusted spread on investment grade corporate bonds recently exceeded 150 basis points, up from just 85 basis points at the start of 2022. Wider credit spreads signal deteriorating credit conditions.

While the labor market remains strong for now, the bond market’s collective signals suggest the risk of an economic downturn is rising. Investors may want to ensure their portfolios are properly positioned defensively in case a recession hits in 2023.

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John Smith is a veteran stock trader with over 10 years of experience in the financial markets. He is a widely followed market commentator known for his astute analysis and accurate predictions. John has authored multiple bestselling books explaining complex market concepts in simple terms for novice investors looking to grow their wealth through strategic trading and long-term investments.
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