Want to make $500 in quarterly dividend income? Invest $17,500 in this extremely high-yielding trio of stocks

There is no single investment strategy on Wall Street. Different strategies can work for all types of investors. But among those various blueprints, buying dividend stocks has a strong track record for long-term investors.

Public companies that regularly pay dividends to their shareholders are virtually all profitable and proven. These are companies that have previously made their way through economic downturns and shown Wall Street that they are perfectly healthy. And most importantly, dividend stocks have significantly outperformed companies that don’t offer a payout for long periods of time.

Arguably the biggest pitfall in chasing income stocks is the possibility of falling into a yield trap. In a perfect world, investors would get the highest possible return with little or no risk. In fact, data has shown that high-yield dividend stocks can sometimes cause problems. Since yield is a function of payout relative to stock price, a company with a flawed business model and a falling stock price can trap unsuspecting investors.

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But a few rotten apples certainly won’t spoil the bunch. For example, if you wanted to rake in $500 in quarterly dividend income, you could easily do that using ultra-high-yielding dividend stocks — “ultra-high-yielding” is a term I use to describe income stocks with yields of at least 7%. If you invested $17,500 (split evenly, threefold) in the following trio of ultra-high-yielding stocks, which have an average yield of 11.47%, you would net $500 in dividend income every three months.

Verizon Communications: 7.04% yield

The telecom giant is the first high-profile income stock that can help you earn $500 in quarterly dividend income with an initial investment of just $17,500 (split in three). Verizon Communications (vz 0.57%). The 7% yield that Verizon is currently analyzing is just a hair short of its all-time high.

One of the reasons telecom stocks are such safe investments has to do with wireless access and smartphone ownership becoming basic needs. Despite fierce competition and the inevitability of recessions, churn rates for wireless carriers like Verizon don’t increase much, even in the toughest of times. Wall Street loves predictability, and Verizon’s operating cash flow tends to be fairly predictable.

While Verizon is a mature company, it has catalysts capable of steadily moving its earnings needle in the right direction. The clearest of these catalysts is 5G. Verizon has constantly upgraded its network to handle 5G download speeds. A steady cycle of device replacements and an increase in data usage helped the company grow its mobile revenue nearly 6% in the fourth quarter and add more than 1.4 million net postpaid adds at retail, its best single quarter in seven years.

However, wireless might not even be Verizon’s top-performing business segment right now. The 416,000 broadband additions in Q4 represent the company’s highest net adds in more than a decade. Verizon invested heavily in the 5G mid-band spectrum with the expectation that home and business broadband services will improve its cash flow and encourage high-margin bundling would. It seems that this bet is paying off well.

The icing on the cake for income investors is that Verizon is also historically cheap. Income seekers can currently buy stocks for less than eight times Wall Street’s consensus earnings for 2023 and 2024. Given the cash flow consistency outlined above, this arguably provides a pretty safe floor under Verizon’s stock.

PennantPark Floating Rate Capital: 12.02% yield

A second high-yielding stock that can be counted on to help investors earn $500 in quarterly dividend income from an initial investment of $17,500 is the little-known Business Development Company (BDC). PennantPark Floating Rate Capital (PFLT -2.06%). PennantPark is a monthly dividend payer whose board of directors recently increased its monthly stipend by 5% to $0.10/share.

A BDC is a type of company that invests in smaller companies (often referred to as “mid-market companies”). BDCs have two options they can take. They either buy mostly the common or preferred stock of middle-market companies, or they can focus on becoming debtors to those companies. PennantPark has chosen the latter, with about 87% of its $1.15 billion portfolio invested in debt as of the end of 2022.

One of the key benefits of choosing debt over equity is that mid-market companies, which are typically valued less than $2 billion, allow PennantPark to generate favorable net returns. Micro-cap and small-cap companies have typically failed, which means their access to the debt and credit markets can be limited. This enables a company like PennantPark to generate superior returns on the debt investments it holds.

But here’s what’s really interesting about the $998.3 million in debt that PennantPark holds: Every penny is floating rate. Every time the Federal Reserve raises interest rates in response to historically high inflation, PennantPark benefits in the form of higher yields on its debt. Between September 30, 2021 and December 31, 2022, the company’s weighted average return on debt investments increased from 7.4% to 11.3%!

Finally, despite its focus on smaller/untried companies, PennantPark’s investment portfolio is sufficiently risk-free. Including its holdings, the firm has invested an average of $9.1 million in 126 companies. In addition, all but $0.1 million of its $998.3 million debt portfolio is senior secured debt. Secured debt instruments with first liens rank first for repayment should a company in which PennantPark invests file for bankruptcy protection.

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Alliance Resource Partners: 15.36% yield

The third high-yield stock that can help you earn $500 in quarterly dividend earnings is the coal producer Alliance Resource Partners (ARLP -0.74%). After several quarterly payout increases over the past year, I can assure you that the 15.4% yield isn’t a misprint.

Alliance Resource Partners benefits from a disrupted energy supply chain. Most people would associate the world’s energy problems with last year’s Russian invasion of Ukraine – and that’s certainly part of the story. The bigger problem, however, may be that demand uncertainty caused by the COVID-19 pandemic has forced major energy companies to scale back their capital investments for three years. With little hope of a rapid increase in crude oil supply, the primary beneficiary is the coal industry.

But it’s not just a higher sales price per ton for coal that’s helping Alliance Resource Partners. Here’s how management has responded to this big spike in coal demand and prices. In particular, the company booked volume and price commitments several years in advance. Based on a median guidance of 37 million tonnes of coal production, Alliance has priced and committed 94% of its forecast production for 2023 (as of the end of January) and 64% for 2024. This creates a highly predictable cash flow that supports its massive spread.

In addition, management has historically been conservative in its approach to production expansion opportunities. Even with coal prices significantly higher than three years ago, management has opted to expand production only modestly. This approach has kept Alliance Resource Partners from being mired in debt.

The other catalyst to consider at Alliance Resource Partners is that it has a growing oil and natural gas royalty portfolio. If the systemic problems with the global energy supply chain continue, higher spot prices for energy commodities should lead to healthy segment earnings before interest, taxes, depreciation and amortization (EBITDA).

Priced at about three times Wall Street’s consensus earnings for 2023 and 2024 (also not a typo), Alliance Resource Partners is one of the cheapest stocks on Wall Street.