Markets

2 ultra high yield dividend plays that should crush the broader market in 2023

While a recession in 2023 is far from a foregone conclusion, the possibility of a mild economic setback at some point this year is a key concern for investors. Fortunately, above-average dividend-paying stocks often make excellent safe-haven investments in uncertain economic times.

For a number of reasons, stocks and exchange-traded funds (ETFs) with elevated shareholder distributions often provide market-beating capital returns during economic downturns. First of all, dividend-paying stocks are generally associated with reliable free cash flow, although companies operating in cyclical industries like shipping or manufacturing are clear exceptions to this rule of thumb.

Roll of US currency next to a sign that says dividend.

Image source: Getty Images.

Second, most management teams are reluctant to reduce dividend payouts. A dividend cut implies that a company is under financial duress – and that’s a signal that management teams generally try to avoid sending to shareholders. Third, above-average dividend yields can help cushion short-term share price declines.

With all of this in mind, I think income-seeking investors might want to consider adding Guggenheim Strategic Opportunities Fund (GOF -0.19%) and Investment Trust (FDUS 0.15%) to their portfolios this year. Here’s why.

Guggenheim Strategic Opportunities Fund

Closed-end funds (CEFs) are a popular vehicle among income investors, mainly because they tend to pay out higher than normal yield due to their frequent use of leverage to enhance returns.

Guggenheim Strategic Opportunities is a good example. This leveraged closed-end mutual fund has paid a steady monthly distribution of $0.1821 per share since mid-2013. At current share prices, this corresponds to an annual return of 13.5%.

From a total return standpoint, the Guggenheim Strategic Opportunities Fund has generated slightly better returns than all the major U.S. stock indexes over the past three years.

GOF Total Return Level Chart

GOF Total Return Level data of YCharts.

Guggenheim Strategic Opportunities Fund’s net asset value has decreased by 19.7% over the past 12 months. In addition, the fund’s share price has fallen by 18.4 per cent. Despite that, it still trades at a hefty premium of approximately 23.3% at the time of writing. In the world of CEFs, premiums above 10% are considered “extreme” by most money managers.

Guggenheim Strategic Opportunities’ significant premium speaks volumes for how investors view this investment vehicle. While it would be easy to interpret that as a red flag, I think it shows that investors trust management’s ability to navigate this turbulent market. The thing is, this fund has consistently paid the exact same distribution to shareholders for 117 consecutive months. Furthermore, CEF has never reduced its monthly payouts since its inception in 2007.

The bottom line is that Guggenheim Strategic Opportunities has proven to be a reliable income generator under a wide variety of market conditions. This simple fact suggests that 2023 will be another one market-beating year for the fund and its shareholders.

Investment trust

Fidus Investment is a closed business development company. Its core business centers around providing customized debt and equity financing solutions to lower middle market companies – companies with annual revenues in the $5 million to $50 million range.

Fidus’ shares have generated better total returns than all but the major US stock indexes Nasdaq Composite over the past 10 years. In 2022, Fidus’ shares gave shareholders a nice total return on capital of 17.2%; in the meantime S&P 500 decreased by approximately 18.1% last year.

How is Scam Crushing the Broader Markets? First, it pays a dividend yielding 9.54% at current share prices. That’s certainly an attractive return for income investors. Second, the company’s top line is on track to grow 16.5% in 2023. As a result, Fidus should have ample free cash flow to support its above-average distribution.

In keeping with this theme, the company’s trailing 12-month payout ratio stands at just 42%. So with income set to increase further in 2023, Fidus should have no problem covering its impressive payout to shareholders this year. That kind of built-in margin of safety could prove to be an important catalyst for the company’s shares in 2023.

George Budwell has no position in any of the shares mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.

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