It's been a rough year for Wall Street and the investing community. Since each of the three major U.S. indexes hit an all-time closing high between mid-November and early January, we've witnessed the widely followed Dow Jones Industrial Average, broad-based S&P 500, and growth-dependent Nasdaq Composite (^IXIC 1.59%) tumble as much as 19%, 24%, and 34%. Significant declines in the S&P 500 and Nasdaq Composite firmly put these indexes in a bear market.
While there's no doubt that the velocity and unpredictability of downward moves during bear markets can weigh on an investor's psyche, history has repeatedly shown that buying high-quality stocks on these dips is a smart, moneymaking strategy. After all, every bear market has eventually been erased by a bull market rally.
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Perhaps the best place to put your money to work right now is in dividend stocks. Companies that regularly pay a dividend are often profitable on a recurring basis, time-tested, and have transparent long-term growth outlooks. It also doesn't hurt that income stocks have, historically, vastly outperformed non-dividend-paying stocks over the long run.
But not all dividend stocks are equal.
The following three ultra-high-yield passive income powerhouses offer sustainably high yields in excess of 10% and (here's the real perk) pay out dividends to shareholders on a monthly basis. They all appear to be amazing deals that patient investors can buy during a Nasdaq bear market.
AGNC Investment Corp.: 13.83% yield
The first monthly dividend payer that's begging to be bought right now by long-term investors is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 2.34%). AGNC's nearly 14% yield is tops on this list, and the company has averaged a double-digit yield in 12 of the past 13 years.
Without getting overly complicated, AGNC's operating model revolves around yields and interest rates. It seeks to borrow money at the lowest possible short-term lending rates, and uses this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS) -- thus, where the name "mortgage REIT" comes from. The wider the difference (known as "net interest margin") between the average yield generated on its owned assets and its average borrowing rate, generally the more profitable AGNC can be.
NASDAQ: AGNC
Key Data Points
What's great about the mortgage REIT industry is that it's highly transparent. Keeping an eye on the U.S. Treasury bond interest rate yield curve and Federal Reserve monetary policy is all you'll need to figure out how mortgage REITs are performing.
At the moment, things couldn't be worse. The Treasury yield curve has flattened significantly and the nation's central bank is rapidly increasing interest rates to bring historically high inflation under control. This has a tendency to increase short-term borrowing costs, which ultimately shrinks AGNC's net interest margin and the value of the MBSs held on its balance sheet.
However, mortgage REITs have almost always been excellent bad-news buys. For instance, the yield curve spends a disproportionately longer amount of time steepening than flattening. Likewise, higher interest rates will also have a cumulatively positive effect on the yields AGNC nets from the future MBSs it purchases. This suggests an eventual widening of the company's net interest margin.
What's more, $66.9 billion of the company's $68.6 billion investment portfolio is invested in agency securities. An "agency" asset is backed by the federal government in the unlikely event of default. This added protection allows the company to prudently utilize leverage to boost its profit potential.
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PennantPark Floating Rate Capital: 10.6% yield
A second ultra-high-yield monthly dividend stock that's a screaming buy as the Nasdaq plunges is business development company PennantPark Floating Rate Capital (PFLT 2.64%). PennantPark's monthly payout has been set at $0.095 per share for more than seven years.
PennantPark predominantly invests in the first-lien secured debt of middle-market companies, but does also own preferred stock and common equity investments. First-lien debtholders are first in line for repayment should a company struggle and file for bankruptcy.
NYSE: PFLT
Key Data Points
The key to PennantPark's success is its focus on middle-market companies. These are typically publicly traded businesses with market caps under $2 billion. Since smaller businesses are often viewed as unproven, their access to debt markets can be limited. This allows PennantPark to net substantially higher yields on the first-lien secured debt it holds than if it were to invest in considerably larger companies. As of the end of March 2022, PennantPark's $1.03 billion debt portfolio was yielding a hearty 7.5%.
But there's much more to this story. All $1.03 billion in debt held by the company is of the variable-rate variety. With the Federal Reserve scrambling to raise interest rates in order to bring inflation under control, each 25-, 50-, or 75-basis-point rate hike can bring in more money for PennantPark's outstanding loans.
Although you might be under the impression that holding debt in smaller businesses would equate to higher risk for PennantPark, this hasn't been the case. As of the end of the first quarter, just two of its 119 separate investments were on non-accrual (delinquent on their payments). This represents just 2.3% of the company's investment portfolio on a fair-value basis. Obviously, this figure would be even better if it were 0%, but it's pretty stellar as-is.
With interest rates rising and management prudently deploying capital, PennantPark's 10.6% yield appears rock-solid.
NASDAQ: HRZN
Key Data Points
Horizon Technology Finance Corp.: 11.02% yield
A third ultra-high-yield monthly dividend stock that's ripe for the picking with the Nasdaq mired in a bear market is specialty finance company Horizon Technology Finance Corp. (HRZN 9.29%). Similar to AGNC, Horizon has sustained a double-digit dividend yield for its shareholders for much of the past decade.
As the company's name indicates, it offers loans to a variety of venture capital-backed businesses in high-growth industries, such as technology, life sciences, renewable energy, and healthcare information. Since small and start-up businesses lack broad access to debt markets, Horizon is able to generate superior yields on the debt it offers and holds. As of March 31, 2022, the annualized portfolio yield on its debt investments was an inflation-crushing 12.4%
Not to sound like a broken record, but while you'd think this strategy would be rife with credit risk, Horizon's debt portfolio shows otherwise. Of the $492.2 million in fair value debt investments held, as of the end of the first quarter, just $5.5 million was viewed as having deteriorating credit quality and a "high degree risk of loss of principal." By comparison, about $472 million (96% of its debt investments) sported a high or standard level of credit risk.
Something else interesting about Horizon Technology Finance that you won't find with the other companies listed here is that it has an outstanding stock repurchase program. Since the program's inception, $1.9 million has been deployed to rebuy its own shares, with an authorized limit of $5 million still outstanding. Buying back stock can reduce the number of shares outstanding and boost earnings per share for businesses with steady or growing net income. In many instances, share buybacks can make a company appear more fundamentally attractive to investors.
If you need one more reason to be excited about this 11%-yielding monthly payer, consider this: Horizon's shares ended last week at 7% below its book value.
