Although there are a lot of ways to make money on Wall Street, buying dividend stocks is one of the smartest.
Nine years ago, J.P. Morgan Asset Management, a division of money-center giant JPMorgan Chase, issued a report comparing the performance of publicly traded companies that paid dividends to those that didn't over a four-decade stretch (1972 to 2012). The results were night and day. The income stocks averaged an annual return of 9.5% over four decades, while the non-dividend payers crawled to an average annual gain of just 1.6% over the same period.
Since dividend-paying stocks are often profitable on a recurring basis and time-tested, it's not surprising that these companies tend to increase in value over the long haul.
While most dividends are paid quarterly, a small handful of income stocks dole out monthly payments to their shareholders. If patience is not your virtue -- at least in the sense of receiving your dividend distributions -- buying monthly dividend payers could be the answer.
If you were to invest $41,800 (split equally) into the following three high-yield stocks, which offer a combined average yield of 8.62%, you would generate $300 in monthly dividend income.
AGNC Investment Corp.: 11.48% yield
The highest-yielding monthly income stock on the list is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 1.81%). AGNC has averaged a double-digit yield in 12 of the past 13 years, so a double-digit yield is par for the course with this company.
Though the products mortgage REITs purchase can be complex, the company's operating model is straightforward. AGNC Investment is looking to borrow money at low short-term lending rates and uses this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The bigger the gap between the average yield from MBSs minus the average borrowing rate (this difference is known as net interest margin), the more profitable AGNC can be.
Right now, AGNC isn't dealing with an ideal scenario. In a perfect world, lending rates are low, and the yield curve (i.e., the difference between short- and long-term Treasury bond yields) is steep. But in reality, the Federal Reserve is expected to raise lending rates multiple times in 2022, and the yield curve has flattened dramatically. This is a recipe for a short-term decline in AGNC's book value.
However, AGNC should also generate higher yields on the MBSs it's purchasing over time as the central bank raises rates. This should lead to a widening of its net interest margin.
What's more, steeper yield curves tend to accompany long-winded expansions in the U.S. economy. Since the economy spends a disproportionate amount of time expanding relative to contracting, patient investors in AGNC can simply wait for the numbers game to work in their favor.
One last thing to note is that AGNC almost exclusively purchases agency assets. An agency security is backed by the federal government in the event of default. This added protection is what allows the company to prudently use leverage to its advantage.
PennantPark Floating Rate Capital: 8.15% yield
The second high-yield stock that can help investors collect $300 in monthly dividend income is the little-known PennantPark Floating Rate Capital (PFLT). It's been parsing out its monthly dividend of $0.095 for the past seven years.
PennantPark is a business development company (BDC) that predominantly invests in the first-lien secured debt of middle-market companies. A "middle-market company" is typically a publicly traded company with a market cap of below $2 billion.
While smaller companies are generally riskier investments, BDCs like PennantPark are able to net significantly higher yields on the outstanding debt they hold. According to the company's fiscal first-quarter results (as of Dec. 31, 2021), it was netting a 7.5% average yield on its $1.03 billion debt securities portfolio.
Since I mentioned the risks associated with smaller companies that may not be time-tested, you might be thinking PennantPark's investment portfolio is full of delinquencies, but that's not the case. In fact, the company had just three non-accruals out of the 115 companies it's invested in, which totaled a mere 2.5% of its portfolio on a fair value basis. There's little concern about PennantPark continuing to pay its monthly stipend to shareholders.
But the most exciting thing about this under-the-radar BDC is what's happening with the Fed. According to PennantPark, 99.9% of the debt it's invested in is of the variable-rate variety. With the nation's central bank predicting multiple rate hikes in 2022, it means PennantPark's average yield on its debt is going to push even higher.
LTC Properties: 6.23% yield
The third and final high-yield stock that can help investors collect $300 in monthly income with an initial investment of $41,800 is skilled nursing and senior housing REIT LTC Properties (LTC -0.47%). LTC's 6.2% yield is going to trump the prevailing inflation rate more years than not.
As you can imagine, LTC took it on the chin when the COVID-19 pandemic hit. As an owner of facilities geared toward senior citizens, an illness that disproportionately impacted seniors had a tangible impact on its bottom line. There were clear concerns about lower occupancy rates and the potential for missed payments from its tenants.
The worst news from the pandemic was the bankruptcy filing of Senior Care Centers, which has resulted in lower rent collection for the time being. However, LTC noted in its year-end operating results that 11 properties previously leased to Senior Care and Abri Health have been transitioned to HMG under a one-year master lease agreement. With vaccination rates ticking up, the U.S. economy reopening, and the company dealing with its Senior Care Centers lease agreement, much of the disruption faced during the pandemic now looks to be firmly in the rearview mirror.
Something else to consider about LTC Properties is that its real estate portfolio is pretty well diversified. It owns 198 properties in 29 states and has 36 operating partners. This all but ensures that LTC can safely navigate the struggles of one or two of its tenants without disrupting its operating model.
Lastly, understand that LTC is perfectly positioned to take advantage of an aging baby boomer population in the United States. Following a wave of boomer retirements, LTC should be in prime position to command high rental rates for its specialized properties.