For the past eight weeks, Wall Street and investors have been offered a reminder that stocks can go down just as easily as they can rise. Both the benchmark S&P 500 and growth stock-driven Nasdaq Composite are mired in their steepest corrections since the pandemic-related crash of February-March 2020.
When the stock market tumbles, investors, rightly, look for safe-havens to put their money to work. Perhaps no investment strategy has proved more fruitful over long periods than buying dividend stocks.
Dividend stocks offer a long history of outperformance
Nine years ago, J.P. Morgan Asset Management, a division of JPMorgan Chase, released a report comparing the performance of publicly traded companies that initiated and grew their payout over 40 years (1972-2012) to public companies that didn't pay a dividend over the same period. The result was a landslide outperformance for the income stocks, with an annualized return of 9.5%, compared to 1.6% for the non-dividend payers.
These results aren't too shocking given that dividend stocks are almost always profitable, time-tested businesses with transparent long-term outlooks.
The challenge for income investors arises from balancing yield and risk. Ideally, dividend investors want the highest yield possible with the least risk. However, data has shown that risk and yield tend to go hand-in-hand once a company reaches high-yield status (4% and above). Since yield is a function of payout relative to share price, a struggling company with a falling share price can sometimes trick income investors into thinking they're getting a great deal.
The good news is that there are ultra-high-yield dividend stocks (those with yields above 7%) investors can trust. In fact, there are even ultra-high-yield stocks that'll pay you monthly, rather than every three months!
If you want $1,000 in monthly dividend income, here are two ultra-high-yield stocks that can deliver.
AGNC Investment Corp.: $106,300 initial investment needed (11.29% yield)
First up is arguably the most well-known monthly dividend payer with an ultra-high yield, AGNC Investment Corp. (AGNC 0.31%). Based on the company's 11.29% yield, as of Feb. 23, an initial investment of $106,300 would net approximately $1,000 in monthly income.
AGNC is a mortgage real estate investment trust (REIT). In easy-to-understand terms, it seeks to borrow money at lower short-term lending rates, then uses this capital to purchase higher-yielding long-term assets, like mortgage-backed securities (MBS). The average yield it receives from MBSs, minus the average borrowing rate, equates to the company's net interest margin (NIM). As you might imagine, the wider the NIM, the more profitable AGNC can be.
At the moment, AGNC and its mortgage REIT peers are entering a period of uncertainty. Since the industry is often very interest-sensitive, rising rates have a tendency to increase short-term borrowing costs. Couple the prospect of higher interest rates with a flattening yield curve in recent weeks, and AGNC has a recipe for shrinking book value. Mortgage REIT share prices often hover close to their respective book values.
While this might not sound appealing to income seekers, I'm probably making it sound worse than it is. Although book value could be pressured in the short-term, the interest rate yield curve has historically spent far more time steepening (i.e., widening) than flattening. As interest rates rise, it'll actually boost the average yield AGNC nets from future MBS purchases. In other words, patient income investors should observe healthy NIM expansion over time.
What's more, AGNC Investment has a habit of sticking to safe assets. At the end of 2021, the company held $82 billion in its investment portfolio, $79.7 billion of which were agency securities. An agency asset is backed by the federal government in the unlikely event of a default. While this added protection does lower the yield on the MBSs AGNC buys, it's also the catalyst that allows the company to utilize leverage to its advantage.
AGNC has averaged a double-digit yield in 12 of the past 13 years, making it an ideal source of monthly income, and a solid way to outpace high inflation.
PennantPark Floating Rate Capital: $135,000 initial investment needed (8.89% yield)
A second ultra-high-yield stock income investors can trust to bring home the bacon is business development company, PennantPark Floating Rate Capital (PFLT 0.47%). Based on a dividend yield of 8.89%, an initial investment of $135,000 would produce $1,000 in monthly income.
PennantPark's operating model is relatively straightforward. It almost exclusively invests in first-lien secured debt of middle-market companies, with much smaller holdings in equity investments, such as preferred stock. A middle-market business is a public company with a small-cap ($300 million to $2 billion) or micro-cap (under $300 million) valuation.
Why middle-market companies? The simple answer is their financing options tend to be limited based on their size and/or unproven/non-time-tested business models. As a result, PennantPark receives higher yields on the debt it holds. Assuming these companies make their interest payments, it's a very profitable venture.
The good news is PennantPark's investment portfolio offers no concerns from the perspective of credit quality. As of the end of 2021, just two of the companies 110 company-based investments were delinquent on their payments, which PennantPark refers to as "non-accrual." This work out to less than 3% of the value of its investment portfolio. Meanwhile, it's generating well over a 7% average yield on its outstanding debt investments.
But what's arguably the most exciting aspect of PennantPark Floating Rate Capital (and is alluded to in the company's name) is that 99% of its debt investments are of the variable-rate variety. With inflation hitting a 40-year high in January, it's all but certain that the Federal Reserve will be hiking lending rates to cool off the rate at which prices are rising. As rates climb, so will the yields PennantPark is netting on its debt investments.
With profit expansion on the horizon, the company's monthly payout of $0.095 appears safely locked in.