It's been a challenging year for everyday and professional investors alike. Since the year began, both the broad-based S&P 500 and technology-dependent Nasdaq Composite have fallen into bear market territory. To add to these challenges, the U.S. economy has contracted in back-to-back quarters and a number of industry-leading companies have lowered their growth outlooks, at least in the near term.
But there is a silver lining to this turmoil. No matter how volatile equities may appear in the short term, every single crash, correction, and bear market throughout history (save for the ongoing bear market) has been wiped away by a bull market rally. In other words, big declines are a red-carpet opportunity for patient investors to pounce.
Arguably the best deals at the moment can be found among dividend stocks. Companies that regularly pay a dividend are almost always profitable on a recurring basis and time-tested -- i.e., they've demonstrated their ability to navigate economic contractions and recessions.
What's more, income stocks have an extensive history of running circles around their non-paying peers. A J.P. Morgan Asset Management report released in 2013 found that companies initiating and increasing their payouts over a 40-year stretch (1972-2012) averaged a 9.5% annual return. As for the non-paying stocks, they managed just a 1.6% annualized return over the same time frame.
But not all dividend stocks are created equally. Some have the potential to provide safe, inflation-crushing income on a monthly basis. The following three ultra-high-yield dividend stocks are averaging... averaging... a 9.73% annual yield and dole out payments to their shareholders every month. If you want to collect $300 in monthly income, you'd only need to invest $37,000, split equally, between these three supercharged monthly payers.
AGNC Investment Corp.: 11.27% yield
The first ultra-high-yield dividend stock dishing out a monster monthly payment is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 2.61%). AGNC's nearly 11.3% yield is, indeed, the highest on this list, and the company has averaged a double-digit yield in 12 of the past 13 years.
Even though the products mortgage REITs buy can be somewhat complex, the operating model for this industry is very easy to understand. Mortgage REITs like AGNC seek to borrow money at the lowest short-term rate possible and acquire higher-yielding long-term assets. These long-term assets tend to be mortgage-backed securities (MBSs), which is how the industry got its name. The larger the gap (known as "net interest margin") between the average yield received from owned assets minus the average borrowing rate, often the more profitable the mortgage REIT.
As I've previously pointed out, what makes AGNC such a favorite among income seekers is the predictability of the mortgage REIT industry. Keeping a close eye on Federal Reserve monetary policy and the interest rate yield curve will pretty much tell investors everything they need to know about how well or poorly the industry is performing.
To be perfectly blunt, AGNC has faced a mountain of headwinds since the beginning of the year. Portions of the yield curve have inverted and the Fed is aggressively hiking interest rates to tame historically high inflation. Both factors have weighed on AGNC's book value (mortgage REITs often trade close to their book value) and net interest margin.
But there's good news: Mortgage REITs are among the stock market's top bad-news buy candidates. For example, while higher interest rates are increasing short-term borrowing costs for AGNC, they're also going to lift the yields generated from purchased MBSs over time. To add to this point, the U.S. economy spends far more time expanding than contracting, which favors a yield curve that slopes up and to the right more often than not. In short, the numbers game suggests patient investors will prevail.
As one final point, AGNC Investment almost exclusively buys agency securities. An "agency" asset is one that's protected by the federal government in the event of default. This extra protection affords AGNC the ability to deploy leverage to pump up its profits.
PennantPark Floating Rate Capital: 9.25% yield
The second ultra-high-yield dividend stock that can help you generate $300 in monthly income is little-known business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.81%). PennantPark's monthly payout has been pegged at $0.095 for more than seven years, with the company currently yielding close to 9.3%.
PennantPark's $1.23 billion investment portfolio consists of a variety of investments. About 13% of its capital is tied up in preferred stock and common stock equity. The remaining 87% is almost entirely comprised of first-lien secured debt from middle-market companies, with a fractional percentage tied up in second-lien secured debt.
A "middle-market company" is typically a publicly traded business with a market cap below $2 billion. Since most small-cap companies aren't profitable and/or time-tested, their access to credit facilities/debt may be limited. PennantPark is more than happy to provide first-lien secured loans to vetted companies because it knows it can generate a juicy yield on that debt. As of the end of June, the company's $1.06 billion debt investment portfolio was generating a whopping 8.5% yield.
Something else to note is PennantPark's choice to pretty much only deal with first-lien secured debt. In the event of default, first-lien secured debtholders are first in line for payment. Mind you, I'm not saying payment delinquencies are a good thing for PennantPark. Rather, I'm laying out the case that its debt portfolio has been prudently de-risked.
Another feather in PennantPark Floating Rate Capital's cap is the investment quality of the company's portfolio. At the end of June, just two of the 123 companies PennantPark had invested in were on non-accrual (i.e., delinquent). This represented a microscopic 0.9% and 0.1% of the company's portfolio on a cost and value basis, respectively.
But the most exciting aspect of this under-the-radar BDC just might be that 100% of its investment debt is of the variable-rate variety. With the nation's central bank increasing interest rates by 225 basis points thus far in 2022, and nowhere close to finished, PennantPark is in great position to collect additional interest income without having to lift a finger. This would suggest its monthly payout is on solid foundation.
Horizon Technology Finance Corp.: 8.67% yield
The third and final ultra-high-yield dividend stock with the ability to help you generate $300 in monthly income is Horizon Technology Finance Corp. (HRZN 0.65%). Horizon has averaged a yield of 10% or higher for most of the trailing decade.
What makes Horizon a bit of an outlier as both a BDC and ultra-high-yield company is its focus on high-growth, developmental-stage companies. As the company's name clearly states, this is a BDC focused on buying debt for ventured capital-backed companies in the technology space. However, it also holds debt in companies engaged in life sciences, healthcare information, and renewable energy.
You're probably thinking that investing in developmental-stage companies will lead to considerably higher default risks. However, a quick look at the company's most recent operating results shows otherwise. Out of its greater than $550 million debt investment portfolio, just 4.3% of outstanding debt has a credit rating of 1 or 2 on the company's scale of 1 through 4. Horizon notes that a 2-rated loan offers a potential for future loss of principal, while a credit rating of 1 implies "deteriorating credit quality and high degree of risk of loss of principal." Even with interest rates rapidly rising, roughly 96% of the company's portfolio is demonstrating high credit quality or a standard level of risk.
Similar to PennantPark, Horizon's focus on small businesses works to its advantage in the yield department. Since it's lending to developmental-stage companies, and many early-stage companies have diminished access to credit markets, Horizon is able to net an inflation-crushing yield on the debt it holds. As of the end of June, Horizon's yield on its debt investment portfolio, which totals 50 investments, stood at a hearty 14.2%.
Something else intriguing about Horizon Technology Finance that you're unlikely to find with other ultra-high-yield monthly payers is that it has an existing share repurchase program in place. Since installing this buyback program, it's bought back $1.9 million worth of its common stock, and has the authorization to repurchase up to $5 million. Reducing the company's outstanding share count has the potential to boost earnings per share and make the company appear more fundamentally attractive to investors.