It has been a challenging year for both everyday investors and professionals. Since the year began, both the broad base S&P 500 and depending on the technology Nasdaq Composite have fallen into bearish territory. To add to these challenges, the US economy has contracted in consecutive quarters and several leading companies in the sector have lowered their growth prospects, at least in the near term.
But there is a silver lining to this confusion. As volatile as stocks can appear in the short term, every crash, correction, and bear market in history (except the ongoing bear market) has been wiped out by a bull market rally. In other words, big dips are a red carpet opportunity for patient investors.
Perhaps the best deals of the moment can be found among dividend stocks. Companies that pay dividends regularly are almost always consistently profitable and time-tested, meaning they have demonstrated their ability to navigate economic downturns and downturns.
Also, income stocks have an extensive history of circling around their non-paying peers. A JP Morgan Asset Management report published in 2013 found that companies that started and increased their payouts over a 40-year period (1972-2012) had an average annual return of 9.5%. As for non-paying stocks, they only achieved an annualized return of 1.6% over the same time period.
But not all dividend stocks are created equal. Some have the potential to provide safe and inflation-beating income on a monthly basis. The following three ultra-high yield dividend stocks have an average… average… an annual yield of 9.73% and distribute payments to its shareholders every month. If you want to collect $300 in monthly income, you’ll only need to invest $37,000, split equally between these three overcharged monthly payers.
AGNC Investment Corp.: 11.27% return
The first high-yielding dividend stock to offer a monster monthly payout is the real estate investment trust (REIT) AGNC Investment Corp. (AGNC -1.34%). AGNC’s nearly 11.3% return is actually the highest on this list, and the company has averaged double-digit returns in 12 of the past 13 years.
While the products that mortgage REITs buy can be somewhat complex, the operating model of this industry is very easy to understand. Mortgage REITs like AGNC seek to borrow at the lowest possible short-term rate and acquire higher-yielding long-term assets. These long-term assets are usually mortgage-backed securities (MBS), which is how the industry got its name. The larger the gap (known as the “net interest margin”) between the average return received on the assets owned minus the average rate of borrowing, often the more profitable the mortgage REIT is.
As I noted earlier, what makes AGNC a favorite among income seekers is the predictability of the mortgage REIT industry. Keeping a close eye on the Federal Reserve’s monetary policy and the interest rate yield curve will tell investors almost everything they need to know about how well or poorly the industry is performing.
To be perfectly blunt, the AGNC has faced a mountain of headwinds since the beginning of the year. Parts of the yield curve have inverted and the Fed is aggressively raising interest rates to control historically high inflation. Both factors have weighed on AGNC’s book value (mortgage REITs often trade near their book value) and net interest margin.
But there is good news: Mortgage REITs are among the prime candidates for buying bad stock market news. For example, while higher interest rates increase AGNC’s short-term borrowing costs, they will also increase the yields generated from the MBS purchased over time. To add to this point, the US economy spends much more time expanding than contracting, which favors a yield curve that slopes up and to the right more often than not. In short, the numbers game suggests that patient investors will prevail.
As a final point, AGNC Investment buys agency securities almost exclusively. An “agency” asset is one that is protected by the federal government in the event of default. This additional protection gives AGNC the ability to deploy leverage to increase its profits.
PennantPark variable rate capital: 9.25% yield.
The second high-yielding dividend stock that can help you generate $300 in monthly income is a little-known business development company (BDC). PennantPark variable rate capital (PFLT -1.47%). PennantPark’s monthly payout has been fixed at $0.095 for more than seven years, with the company yielding close to 9.3%.
PennantPark’s $1.23 billion investment portfolio consists of a variety of investments. About 13% of its capital is tied up in preferred stock and common stock. The remaining 87% is composed almost entirely of first-lien secured debt of middle-market companies, with a fractional percentage tied to second-lien secured debt.
A “middle market company” is usually a publicly traded company with a market cap of less than $2 billion. Since most small-cap companies are not profitable and/or time-tested, their access to credit/debt facilities may be limited. PennantPark is more than happy to offer first lien secured loans to approved businesses because they know they can generate a juicy return on that debt. As of the end of June, the company’s $1.06 billion debt investment portfolio was yielding 8.5%.
Another thing to note is PennantPark’s choice to deal virtually only with first lien secured debt. In the event of default, the first secured debt holders are first in line for payment. Note that I am not saying late payments are a good thing for PennantPark. Rather, I am making the case that their debt portfolio has been prudently disposed of.
Another key to PennantPark Floating Rate Capital’s cap is the investment quality of the company’s portfolio. At the end of June, only two of the 123 companies in which PennantPark had invested were non-accrual (ie non-performing). This represented a microscopic 0.9% and 0.1% of the company’s portfolio in terms of cost and value, respectively.
But the most exciting aspect of this under-the-radar BDC might be that 100% of its investment debt is floating rate. With the nation’s central bank raising interest rates by 225 basis points through 2022, and nearing completion, PennantPark is in a great position to collect additional interest income without lifting a finger. This would suggest that your monthly payment is on a solid footing.
Horizon Technology Finance Corp.: 8.67% yield
The third and final high-yielding dividend stock with the ability to help you generate $300 in monthly income is Horizon Technology Finance Corp. (HRZN -1.55%). Horizon has averaged returns of 10% or better for most of the last decade.
What makes Horizon somewhat atypical, both as a BDC and as a high performance company is its focus on high-growth and development-stage companies. As the company’s name clearly indicates, this is a BDC focused on buying debt for venture capital-backed companies in the technology space. However, it also has debt in companies dedicated to life sciences, health information and renewable energy.
You probably think that investing in early-stage companies will carry a considerably higher risk of default. However, a look at the company’s most recent operating results shows otherwise. Of its debt investment portfolio of more than $550 million, only 4.3% of outstanding debt has a credit rating of 1 or 2 on the firm’s scale of 1 to 4. Horizon notes that a 2-rated loan offers the potential for future principal loss. , while a credit rating of 1 implies “a deterioration in credit quality and a high degree of risk of principal loss.” Even with rapidly rising interest rates, approximately 96% of the company’s portfolio demonstrates high credit quality or standard risk.
Similar to PennantPark, Horizon’s focus on small businesses works to its advantage in the performance department. Because it lends to early-stage companies and many early-stage companies have reduced access to credit markets, Horizon is able to generate inflation-crushing returns on the debt it holds. At the end of June, Horizon’s return on its debt investment portfolio, which totals 50 investments, stood at 14.2%.
Another intriguing thing about Horizon Technology Finance that you’re unlikely to find with other high-yield monthly payers is that it has an existing share buyback program. Since instituting this repurchase program, it has repurchased $1.9 million of its common stock and is authorized to repurchase up to $5 million. Reducing the number of shares outstanding in the company has the potential to increase earnings per share and make the company appear more attractive to investors.