An irrefutable bull market is in sight. But let me explain what I mean by that.
Many investors believe we’re already in a new bull market. The major market indexes are all at least 20% above their lows after falling at least 20%. That’s a bull market for some.
Others think that the market indexes must check off those boxes plus reach a new all-time high. They haven’t achieved this yet, but they’re close. That’s why I maintain that an irrefutable bull market — one that everyone can agree on — is in sight.
There will be plenty of growth stocks to pile into if an indisputable new bull market begins and picks up momentum. But what about ultra-high-yield dividend stocks? I think some of those stocks will be good picks as well. There’s one ultra-high-yield dividend stock I think is the best to buy and hold in a new bull market.
My criteria
Before I get to that top pick, let’s look briefly at the criteria that I used in my selection process. First, I define “ultra-high yield” as a yield that’s at least four times greater than the yield of the SPDR S&P 500 ETF Trust. Since SPY’s yield currently stands at 1.47%, my ultra-high yield threshold is 5.88%.
That’s the easy part. The harder part is defining “best.” In my view, the best ultra-high-yield dividend stock has a truly ultra-high yield — closer to 10% than the cut-off of 5.88%.
That dividend, though, must be sustainable. The company should be able to fund its dividend now and in the future. A solid track record of paying (and preferably growing) dividends is also a big plus.
While dividends are great, total returns are even more important. The best ultra-high-yield dividend stock should provide both.
The best
With those criteria established, my vote for the best ultra-high-yield dividend stock goes to… Ares Capital (ARCC -0.36%). Sure, there are other impressive contenders. However, I believe that Ares Capital rises to the top.
Ares Capital’s dividend yield currently stands above 9.8%. No one is going to quibble about whether or not the yield is ultra-high. The company has also declared steady or growing regular dividends for 56 consecutive quarters.
This solid track record is a testament to Ares Capital’s underlying business strength. Ares Capital ranks as the largest publicly traded business development company (BDC). It provides financing to middle-market businesses and arguably is the best in the industry.
Ares Capital is highly selective about the transactions it funds. Its average closing rate is around 5%. The BDC avoids deals with companies in especially volatile industries. Its portfolio is diversified across more investments than its peers. As a result of this superior risk management, Ares Capital’s loss rate is well below the industry average.
The company operates in a growing market. Many banks have pulled back from direct lending to middle-market businesses over the years. These businesses have increasingly turned to BDCs such as Ares Capital.
Finally, Ares Capital has generated total returns that have handily beaten the S&P 500 since the company’s initial public offering in October 2004. But that outperformance isn’t only due to strong total returns in its early days. Ares Capital has beaten the S&P 500 over the last three years and five years as well.
What if the bull market fades?
While an irrefutable bull market is in sight, it hasn’t arrived yet. There’s a chance that the major market indexes won’t reach new all-time highs. Even if they do, it’s possible that the new bull market could quickly fade.
Would Ares Capital still be the best ultra-high-yield dividend stock to buy and hold if that happens? I think so.
The stock fared better than the S&P 500 did during last year’s market sell-off. Those juicy dividends helped cushion Ares Capital’s decline considerably, too.
Importantly, Ares Capital stock isn’t overvalued like many stocks are these days. Its shares trade at a forward price-to-earnings ratio of only 8.5x. By comparison, the S&P 500’s forward earnings multiple is 19.6x. I expect that Ares Capital’s attractive valuation would keep it from falling as heavily as many other stocks during a downturn.
There are other stocks that could deliver better total returns during bull markets. There are others that could outperform during bear markets. But if you’re looking for the best ultra-high-yield dividend stock to buy and hold with a new bull market in sight, I think that Ares Capital is it.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.