Income-seeking investors looking for ultra-high-yield dividend stocks can find what they’re looking for in the healthcare and finance sectors. Walgreens Boots Alliance (WBA 2.14%) and PennantPark Floating Rate Capital (PFLT -0.28%) offer yields above 10% at recent prices.
Before opening your brokerage application to buy these stocks, it’s important to remember dividend yields usually don’t climb this high unless investors are worried about the underlying businesses.
Here’s a quick look at what’s been pushing these stocks down, and their dividends up, to see if they’re smart buys now.
1. Walgreens Boots Alliance
At the end of 2023, Walgreens Boots Alliance had a 49-year annual dividend-raising streak under its belt. This year, though, the company slashed its quarterly payout by 48% down to just $0.25 per share.
Despite the dividend reduction, Walgreens still offers an ultra-high yield that’s hard to ignore. After its price collapsed by about 57% in 2024 the stock offers a huge 10.5% yield.
Walgreens stock is down because its underlying business is bleeding money. During its fiscal 2024, which ended on Aug. 31, the company reported a $14.1 billion operating loss related to its ill-fated attempt to provide primary care services.
A $12.4 billion non-cash impairment charge related to its VillageMD joint venture with Cigna was responsible for the vast majority of Walgreens’ loss in fiscal 2024. Sadly, this isn’t the only problem the company needs to fix.
Profit margin in the U.S. retail pharmacy segment is deteriorating. Sales rose 5% year over year, but adjusted operating income from the segment shrank by 41% to $2.2 billion.
Mail-order pharmacies and 90-day refills are increasingly popular, which means less foot traffic in retail locations. As a result, comparable retail sales fell by 3.4% in fiscal 2024.
In fiscal 2025, Walgreens expects adjusted earnings to land in a range between $1.40 and $1.80 per share. This is sufficient to maintain a dividend payment currently set at $1.00 annually, but this stock could end up lowering its payout further if profit margin continues deteriorating.
The Wall Street Journal recently reported that Walgreens is in talks with a private equity group called Sycamore Partners regarding a potential sale. The firm is known for acquiring troubled retailers, but healthcare isn’t its strong suit.
Sycamore will probably need to bring other financial institutions on board to meet the numbers necessary to pull off an acquisition of Walgreens and its enormous chain of retail assets. With this in mind, it’s probably best to watch this stock’s story play out from a safe distance.
2. PennantPark Floating Rate Capital
PennantPark Floating Rate Capital is a business development company (BDC) that lends to midsize companies, which U.S. banks are increasingly hesitant to lend to. Specifically, it lends to core-midmarket businesses with between $10 million and $50 million in annual earnings before interest, taxes, depreciation, and amortization (EBITDA).
Income-seeking investors like BDCs because they must distribute at least 90% of their earnings to shareholders as a dividend. At recent prices, PennantPark’s monthly dividend payout offers a huge 11.4% yield.
PennantPark has maintained or raised its dividend payout since it started paying one in 2011. The stock has been under pressure because, as its name implies, nearly all its outstanding loans collect interest at variable rates. The Federal Reserve has lowered rates by a full percentage point this year, which could make meeting its dividend obligation more challenging in 2025.
Lower interest rates will pressure earnings, but they probably won’t stop PennantPark Floating Rate Capital from meeting its dividend obligation. During its fiscal 2024, which ended on Sept. 30, the BDC reported core net investment income that exceeded dividend payments and said its portfolio is growing.
In fiscal 2024, this BDC purchased new investments worth $1.4 billion, and its underwriting team rarely picks a non-performer. The BDC currently lends to 131 middle-market companies. At the end of September, just two, representing 0.4% of the portfolio, were on non-accrual status.
If interest rates were expected to rapidly drop in 2025, this could be a stock to avoid. With the Federal Reserve hinting at slower, more gradual rate reductions in the year ahead, mashing the buy button looks like the right move now.
