Dividend Stocks

7 High-Yielding Dividend Stocks to Mix Risk with Income

With the coronavirus pandemic forcing an unprecedented response by the Federal Reserve, it set in motion a dynamic that helps dividend stocks to buy.

The consumer price index increased by 0.6% in January leading to an annual inflation market of 7.5%. The magnitude of the spike caught many analysts off guard. However, the price increase was no surprise.

As you know, investors began rotating out of risk-on assets quite aggressively early this year. With the Fed signaling a pivot toward a hawkish monetary policy, it meant that the central bank would no longer indirectly subsidize growth through cheap costs of borrowing.

Instead, with the money supply seemingly scheduled to tighten, emphasis shifted toward stable dividend stocks tied to reliable businesses.

Even the best dividend stocks could be at risk for capital erosion if headwinds turn out to be more pernicious than expected.

However, certain segments in the market may offer significant upside. Granted, higher yields entail higher risks, but if you can handle the heat, there are certain opportunities you may want to consider.

  • Phillips 66 Partners LP (NYSE:PSXP)
  • Sunoco LP (NYSE:SUN)
  • Kinder Morgan (NYSE:KMI)
  • Southern Copper (NYSE:SCCO)
  • Altria Group (NYSE:MO)
  • Bain Capital Specialty Finance (NYSE:BCSF)
  • WhiteHorse Finance (NASDAQ:WHF)

Since we really don’t know what’s going to happen with this inflationary crisis, your portfolio should probably lean more toward established blue-chip dividend stocks. If you have some room for speculation, you could choose to divert funds to the above ideas — following extensive due diligence of course!

Dividend Stocks to Buy: Phillips 66 Partners LP (PSXP)

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Phillips 66 Partners LP  is a master limited partnership (MLP) formed by oil giant Phillips 66 (NYSE:PSX).

It owns, operates, develops and acquires primarily fee-based crude oil, refined petroleum product and natural gas liquids (“NGL”) pipelines and terminals and other transportation and midstream assets.

Before you consider acquiring PSXP, you should note the tax considerations behind MLPs. They combine the tax benefits of a partnership with the convenience and liquidity of a publicly-traded security.

Though they may be tax-efficient for investors, filling in the necessary Schedule K-1 can be a hassle. Thus, think carefully about your personal situation before proceeding.

However, if you don’t mind dealing with the K-1, PSXP could be one of the high-yielding dividend stocks that also enjoy capital gains potential.

First, the company features a yield of 7.59%, whereas the energy industry’s average yield is 4.24%. Second, a crisis with Russia would entail a huge reduction in global supplies of vital energy assets, presenting a potential premium for PSXP.

Again, if you don’t mind the extra paperwork, PSXP could be an effective way to mitigate geopolitical risk.

Sunoco LP (SUN)

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Another MLP, Sunoco LP per its website “is one of the largest independent fuel distributors in the United States, providing motor fuel to convenience stores, independent dealers, commercial customers and distributors in more than 33 states and growing.”

Here’s the deal. Based on the latest read regarding vehicle miles traveled, traffic volume overall has basically returned to normal.

Therefore, you’re going to see increased demand for fuel, irrespective of whatever’s going on in the world.

More importantly, energy commodities like gasoline represent a necessary expense. You simply have to pay up, no matter how high gas prices are.

Adding to potential upside pressure is that the work-from-home experiment might not be permanent.

You must look at the situation from a business owner’s perspective. If you’re hiring people to do a job, you want them in location in part to keep them accountable. This in turn may result in higher traffic volume, boosting Sunoco’s profile.

Dividend Stocks to Buy: Kinder Morgan (KMI)

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One of the largest energy infrastructure companies in North America, Kinder Morgan owns and controls vast networks of oil and gas pipelines and terminals.

In addition to oil and natural gas, Kinder facilitates the transportation of gasoline, carbon dioxide and other commodities. As well, its terminals store and handle renewable fuels, petroleum products, chemicals and vegetable oils, among other products.

At this juncture, KMI appears very attractive. It has solid market performance, with shares up over 7% year-to-date. Bear in mind that the benchmark S&P 500 is down nearly 8% over the same period.

Of course, there’s also the 6.2% dividend yield, well above the industry average of 4.24%.

Southern Copper (SCCO)

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Following a steep decline during the March 2020 doldrums, Southern Copper rocketed higher, making it one of the top dividend stocks to buy.

Presently, the company features a 6% yield, which is much higher than the 2.8% average yield for the materials industry. Moving forward, SCCO should continue providing a healthy balance between capital gains potential and passive income.

As you probably heard over the trailing year, many cities across the U.S. have reported a rise in copper-related theft.

With inflation soaring to 7.5%, it’s only natural for thieves to covet copper. As an in-demand commodity, copper will hold its value, unlike the greenback, which is dramatically losing its purchasing power.

However, another factor supporting SCCO and its underlying asset are next-generation technologies.

For instance, everyone loves talking about how electric vehicles are the future. While I personally tend to go back and forth regarding this idea, if EVs dominate transportation networks, they’re going to require plenty of copper.

Therefore, investors with a longer-term time horizon should consider adding SCCO to their list of dividend stocks to buy.

Dividend Stocks to Buy: Altria Group (MO)

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Before I get into my discussion for Altria Group, a quick disclosure: I own shares of MO stock so take what I have to say with a grain of salt.

Another reason to be skeptical about MO is that over the years, smoking rates have declined.

According to the Centers for Disease Control and Prevention, “Current smoking has declined from 20.9% (nearly 21 of every 100 adults) in 2005 to 14.0% (14 of every 100 adults) in 2019, and the proportion of ever smokers who have quit has increased.”

That’s good news for society, not-so-great news for dividend stocks tied to the tobacco industry. So, why bother with Altria?

The pandemic has increased stress levels for people on average. It’s not just about the fear of contracting Covid-19 but also the various social and economic ramifications.

In my view, it’s very possible that people will seek stress release, which may lift industries such as tobacco and alcohol.

More importantly, though, Altria is developing cleaner solutions, such as heated tobacco products that may satisfy cravings without imposing the magnitude of harm associated with traditional cigarettes.

Bain Capital Specialty Finance (BCSF)

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If you’re ready to assume a boatload of risk with high-yield dividend stocks in the hopes of massive gains, you might want to check out Bain Capital Specialty Finance.

Structured as a business development company (BDC), this type of organization primarily invests in small and medium-sized enterprises. In addition, many BDCs invest in distressed companies.

As you might imagine, BDCs take this approach to benefit from early stage businesses that have tons of potential but not much capital backing.

Additionally, a distressed company might only need some capital to help it fill some temporary concerns before eventually rising. Of course, it’s a super-risky endeavor but the possible rewards keep investors coming back for more.

Regarding Bain Capital specifically, the company exclusively focuses on middle-market investments, which gives BCSF stock a relatively solid balance. Currently, the company features an 8.5% yield, whereas the financials industry features an average yield of only 3.2%.

Still, BDCs are high risk so only approach this with funds earmarked for speculation.

Dividend Stocks to Buy: WhiteHorse Finance (WHF)

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An externally managed, non-diversified, closed-end management investment company, WhiteHorse Finance, like Bain Capital Specialty Finance above, is structured as a BDC.

The main difference is that WhiteHorse primarily originates senior secured loans to privately held small-capitalization companies.

Logically, focusing on smaller firms presents huge upside potential. On the other hand, if management gets it wrong, you’re looking at severe downside.

Under an inflationary cycle where investors are rotating out of risk-on assets, WhiteHorse appears a dangerous idea. You’re not going to find me arguing otherwise.

There are dividend stocks, there are high-yield dividend plays and then there’s WHF. You should only put in money you can afford to lose.

Still, WhiteHorse isn’t entirely crazy. Because of its focus on privately held small-cap firms, this segment could fly under the radar. Further, smaller companies tend to have smaller overhead, which may come in handy if we encounter an economic crisis.

Finally, we have the 9.32% yield, which is so high that it raises eyebrows. Still, if WhiteHorse makes the right bets, WHF could seriously fly.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.