The ongoing year has been brutal for both experienced and novice investors. Stock market indices such as the S&P 500 and Nasdaq Composite are currently trading 17.6% and 27.7% below all-time highs, respectively. In fact, the S&P 500 briefly entered bear market territory in July before it wiped out a part of these losses.
Yes, a bear market can be extremely scary due to the near-term unpredictability and volatility associated with these events. But it also provides investors an opportunity to go bottom fishing and buy stocks at a bargain. Each double-digit percentage decline in the U.S. has been followed by a bull market rally.
Dividend stocks can help you create wealth in a bear market
Investors can also look to buy quality dividend stocks in a bear market. Companies that pay dividends are consistently profitable and derive cash flows in good times and bad. A J.P. Morgan (NYSE: JPM) report stated that publicly traded companies that began paying dividends between 1972 and 2012 returned an average of 9.5% annually. Comparatively, stocks with a dividend yield generated returns of just 1.6% in the 40-year period.
While dividends can help investors create an alternate income stream, not all dividend stocks are a good bet. In fact, studies have shown that dividend yields of over 4% may carry higher risk-reward profiles. But the current bear market has also driven prices significantly lower, which has increased forward yields in 2022.
Here, I have identified two high-yield dividend stocks investors can consider buying right now.
Annaly Capital Management
A mortgage REIT (real estate investment trust), Annaly Capital Management (NYSE: NLY) is a passive-income powerhouse given a forward dividend yield of 13.8%. In the last two decades, it has managed to sustain a dividend yield of more than 10%.
The REIT borrows capital at a low short-term rate and uses the money to purchase high-yield assets such as mortgage-based securities. So, the net interest margin, which is the difference between the yield earned from the asset a company owns and the borrowing rate, should be wide enough to deliver consistent profits.
Shares of the REIT are down 20% from all-time highs as the current environment is very challenging. The yield curve has inverted, resulting in negative net interest margins and lower book values for Annaly Capital. But almost $75 billion of its $82.3 billion assets are agency securities, which are backed by the federal government in case of defaults.
Another stock that has a juicy dividend is Antero Midstream (NYSE: AM) which yields a tasty 8.9% even though the company lowered its dividend payout by 27% in 2021.
Two years back, COVID-19-induced lockdowns sent share prices of oil and gas stocks significantly lower. In April 2020, WTI (West Texas Intermediate) oil futures contracts traded at a negative $40/barrel.
But midstream operators such as Antero are better poised to withstand downturns. Antero operates natural gas gathering and processing assets while providing water delivery and blending solutions for parent company Antero Resources (NYSE: AR).
Additionally, 100% of its contracts with Antero Resources are fixed fee allowing the company to generate stable cash flows. Antero Midstream reduced its dividends in 2021 due to rising natural gas prices. To take advantage of an inflationary environment, Antero Resources wants to boost drilling on Antero Midstream’s acreage.
A dividend cut will improve the financial flexibility of Antero Midstream, allowing it to invest in capital expenditures. The company’s cash flows will increase by $400 million by 2025 following the cut.