There's no one-size-fits-all moneymaking strategy on Wall Street. Over time, we've watched growth and value investors thrive. But if there's been one near-constant, it's the outperformance of dividend stocks over the long run.
Although the data is now nine years old, a report from J.P. Morgan Asset Management, a division of JPMorgan Chase, highlights the undeniable potential of dividend stocks to make people rich over time.
In 2013, J.P. Morgan Asset Management compared the performance of public companies that initiated and grew their payouts between 1972 and 2012 to public companies that didn't offer a dividend over the same stretch. The result? Dividend-paying companies averaged an annual return of 9.5% over four decades, which handily surpassed the meager 1.6% annual return for non-dividend-paying stocks over 40 years.
Since dividend stocks are usually profitable on a recurring basis, have clear long-term outlooks, and are time-tested, they're often a smart place for investors to put their money to work in any economic environment.
The big dilemma that income investors face is deciding how to safely maximize the yield they'll receive while minimizing risk. Given that risk and yield tend to be correlated when yields hit 4% and above, this is easier said than done.
The good news is that there are high-quality dividend stocks that have a track record of delivering for their shareholders. In fact, some of these income stocks provide a monthly payout. If you're the impatient type who demands the regular gratification of dividend payments, the following trio of high-yield stocks could be the answer. With an average yield of 7.97%, an investment of $15,100, divided evenly among these stocks, would produce $100 in monthly dividend income.
AGNC Investment Corp: 8.73% yield
Mortgage REITs like AGNC borrow money at short-term lending rates and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBSs). The goal for mortgage REITs is to maximize their net interest margin, which describes the difference between the average yield on long-term assets minus the average borrowing rate.
The great thing about mortgage REITs like AGNC is that there aren't many surprises. These are companies that ebb and flow with interest rates, and their movements are often highly predictable. Generally, a flattening yield curve (a situation where the yield difference between short- and long-term Treasury bonds narrows) and/or a Federal Reserve that's making big changes to its monetary policy are headwinds for companies like AGNC. Conversely, a steepening yield curve with slow-walked monetary policy changes tends to be a positive for the mortgage REIT industry.
Looking back decades, the early years of an economic recovery almost exclusively demonstrate a steepening yield curve and generally dovish monetary policy. In other words, it's AGNC's time to shine.
Something else income investors will appreciate is the company's focus on agency MBSs. An agency asset is backed by the federal government in the event of a default. As of June 30, $85.5 billion of the company's $87.5 billion investment portfolio was comprised of agency securities. While this added protection does weigh down long-term yields, it also allows the company to lever its investments to boost its profit potential.
AGNC has averaged a double-digit dividend yield in 11 of the past 12 years, making it a premier income stock among monthly dividend payers.
PennantPark Floating Rate Capital: 8.57% yield
For something completely under the radar, income investors seeking high-yield monthly dividends should consider buying PennantPark Floating Rate Capital (PFLT 2.26%). PennantPark is outlaying $0.095 monthly, which is a payout it's held since March 2015.
PennantPark is a business development company that primarily focuses on first-lien secured debts and, to a lesser degree, common equity investments, such as preferred stock. However, instead of providing financing for well-known businesses, PennantPark is predominantly a first-lien holder in smaller-capitalization, private businesses that might otherwise not have the financing options available from banks that larger companies can receive.
Why focus on middle-market companies? The simple answer is yield. With fewer available financing options, PennantPark is able to secure average debt yields north of 7%, which is what fuels the company's supercharged dividend.
What's more, virtually all of PennantPark's companies are making good on their obligations. As of June, the company's investment portfolio consisted of 100 companies, of which only two were on non-accrual (i.e., 90 days delinquent on their payments). This is a small percentage of its portfolio considering the company is focused on smaller-cap (i.e., less established) companies.
Arguably the best aspect of PennantPark Floating Rate Capital is, as the name suggests, its variable-rate loans. As of the end of June, 98% of its debt portfolio consisted of variable-rate instruments. With interest rates having nowhere to go but up, PennantPark's lenders are going to be paying more to the company in the years to come.
LTC Properties: 6.62% yield
A third monthly dividend stock that can deliver sustainable outsized payouts is skilled nursing and senior care REIT LTC Properties (LTC 0.98%). LTC has the "lowest" yield on this list at 6.6%. But to put this into perspective, LTC's yield is nearly quintuple that of the broad-based S&P 500.
Without sugarcoating things, LTC and its peers had a rough 2020 and start to the current year. The coronavirus pandemic brought admissions to skilled nursing facilities and senior housing to a crawl, which in turn led to some level of rental delinquencies from LTC's rental base. In particular, Senior Care Centers, a key renter from LTC, filed for bankruptcy protection and didn't make its rental payments in the second quarter.
Yet in spite of these issues, LTC's dividend hasn't been cut, and its overall business has quickly bounced back. Excluding Senior Care and Senior Lifestyle, the company collected nearly 94% of its rent and mortgage interest income in the second quarter. With vaccination rates ticking higher, especially among the elderly population and skilled nursing facility workers, the prospect of returning to business as usual is somewhat in sight.
Furthermore, LTC Properties' diversity has been a boost. The company holds first-lien mortgages on close to 180 properties in 27 states, and more importantly has 30 lease operators. With only four of its 30 operators leasing more than nine properties, as of June, LTC has ensured that its business won't be turned on its head by a single operator's struggles.
Lastly, the company should also benefit immensely from the aging of America. As baby boomers age, demand for senior housing and skilled nursing is only bound to increase, which will put the proverbial ball, and rental pricing power, in LTC's court.