While there is no shortage of ways to make money on Wall Street, few investing strategies have proved more successful over long periods of time than buying dividend stocks.
In 2013, J.P. Morgan Asset Management, a division of JPMorgan Chase, issued a report that compared the performance of publicly traded companies paying a dividend to their non-dividend-paying peers over a four-decade stretch (1972-2012). The results were as eye-opening as you might expect. Companies that paid a dividend averaged an annual return of 9.5% over 40 years. By comparison, the non-dividend-paying stocks struggled to an annualized gain of 1.6% over the same period.
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The reason for this massive difference in long-term performance is pretty straightforward: Companies that sustainably pay and/or grow their dividends tend to be profitable and time-tested. Businesses that are profitable and have transparent long-term growth outlooks are expected to increase in value over time.
However, buying dividend stocks does come with one noted risk: Chasing yield.
Ideally, income investors want the highest yield possible with the least amount of risk. But the data shows that risk and yield tend to correlate once you hit the high-yield category (4% and above). Since yield is a function of payout relative to share price, a struggling company with a plunging share price can trick investors into thinking they've found the income jackpot. In other words, high-yield stocks require a lot of careful vetting by income investors.
But every so often, dividend gems emerge. While most dividend stocks parse out their payments to shareholders every three months, a small group of high-yielding companies doles out payouts on a monthly basis. If you were to invest $26,500 (split equally) into the following trio of top-notch monthly payers, their average yield of 9.07% would generate $200 in monthly dividend income.
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AGNC Investment Corp.: 9.78% yield
The highest-yielding monthly payer on this list is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 0.87%). Believe it or not, the company's nearly 9.8% yield is below its historic average. Over the past 13 years, AGNC has averaged a double-digit dividend yield for 12 of those years.
Though the securities mortgage REITs own can sometimes be complex, their operating model is relatively straightforward. AGNC Investment aims to borrow money at low short-term lending rates and uses this capital to purchase higher-yielding long-term assets, like mortgage-backed securities (MBSs). The goal for the company is to maximize its net interest margin, which is determined by taking the average yield from its asset portfolio and subtracting the average borrowing rate.
One reason for investors to be excited about AGNC is where we are in the economic growth cycle. It's common for the interest rate yield curve to steepen when coming out of a recession. This "steepening" involves the gap in yields between short- and long-term Treasury bonds widening. When this happens, AGNC typically sees its net interest margin increase.
Something else that'll be key for AGNC's success is the Federal Reserve slow-stepping its monetary policy changes. Although higher lending rates should increase short-term borrowing costs, what AGNC is counting on is the nation's central bank outlaying its policy proposal and sticking to that plan. As long as there are no big surprises, AGNC and its peers will have ample time to adjust their portfolios to maximize profits.
Investors will also note that $82 billion of the company's $84.1 billion in investment portfolio assets are agency securities. An agency asset is backed by the federal government in the unlikely event of a default. This protection allows AGNC Investment to deploy leverage in order to increase its profit potential.
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PennantPark Floating Rate Capital: 9.09% yield
Another high-yield dividend stock delivering a juicy monthly payout is business development company PennantPark Floating Rate Capital (PFLT 1.16%). For nearly seven years, PennantPark has doled out a monthly payout of $0.095, which works out to a yield of more than 9%, as of Jan. 23.
Like AGNC, PennantPark Floating Rate Capital has an easy-to-understand operating model. It predominantly invests in middle-market companies via first-lien secured debt and equity investments, such as preferred stock. A middle-market business is a publicly traded company on the micro-cap or small-cap spectrum. The reason it focuses on middle-market companies is because there's not as much competition and the yields on outstanding debt tend to be higher.
The beauty of PennantPark's operating model can be seen in the breakdown of its asset portfolio. For example, the company's fiscal 2021 year-end portfolio consisted of approximately $943 million in debt, 99% of which was of the variable-rate variety. With the Federal Reserve expected to raise rates three or more times in 2022, PennantPark should see a sharp uptick in net interest income in the years that lie ahead.
The credit quality of PennantPark's debt portfolio is equally impressive. Only two of the 110 company-based investments were on non-accrual (i.e., delinquent), according to the company's year-end report. This represents less than 3% of the company's overall portfolio value. Meanwhile, it's generating an inflation-topping 7.4% average yield on its outstanding debt investments.
PennantPark Floating Rate Capital isn't going to make investors rich, but it's a smart way to generate income that'll handily outpace the prevailing inflation rate.
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Horizon Technology Finance Corp.: 8.33% yield
The third high-yield stock doling out an insanely high monthly payout is specialty finance company Horizon Technology Finance Corp. (HRZN 1.36%). Horizon has paid a steady $0.10 each month to its shareholders since December 2016.
What makes HTFC, as the company is commonly known, such an intriguing business is its focus on lending to a number of high-growth and innovative industries backed by venture capital. In particular, HTFC's loan portfolio primarily targets technology, healthcare information, renewable energy, and life science companies. The high-growth potential backing these companies often allows HTFC to nab favorable rates on what it loans out.
Even though many of the 43 debt investments Horizon has made are in relatively young companies, the credit quality of its portfolio is impressive. Only three of the 43 investments are below the standard level of risk, with a mere $2.8 million of the company's nearly $430 million debt investment portfolio (as of Sept. 30) at a high risk of losing principal.
What does prudent risk management do for a company that's lending to high-growth businesses? In the third quarter, it led to an annualized portfolio yield on debt investments of 16.2%, which in turn provided a lift to the company's net asset value from the prior-year period.
Something else intriguing about Horizon Technology Finance Corp. that you won't see from the other companies on this list is that it has an active stock repurchase program. Last year, the company's board authorized the repurchase of up to $5 million in the company's stock. Buying back stock reduces the number of shares outstanding, which can increase earnings per share and make a company more fundamentally attractive. Share repurchases are often also a sign of steady profitability.
