There's no way to sugarcoat it: This has been a difficult year for professional and everyday investors. The first half of the year saw the broad-based S&P 500 produce its worst return in over a half-century. Meanwhile, the technology-focused Nasdaq Composite pushed firmly into bear market territory, with a peak loss of around a third of its value.
While the exceptionally poor performance of the stock market has been an unpleasant reminder that stocks don't move up in a straight line, it's also important to recognize that every single correction and bear market throughout history has proven to be a buying opportunity for patient investors. Eventually, every sizable decline in the major U.S. indexes has been fully recouped (and some) by a bull market rally.
In other words, it's not a question of if you should buy when a bear market arises. It's simply a matter of what to buy.
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Ultra-high-yield monthly dividend stocks can be your golden ticket to riches
Perhaps the smartest decision investors can make right now is to put their money to work in dividend stocks. Companies that regularly pay a dividend are often profitable on a recurring basis and time-tested. Since these are businesses that have successfully navigated their way through economic slowdowns, there's little to no concern about their ability to thrive once the U.S. and global economy find their footing, once again.
What's more, income stocks offer a clear-cut history of outperformance when compared to their non-paying peers. In 2013, J.P. Morgan Asset Management released a study showing that companies initiating and growing their payouts between 1972 and 2012 averaged a 9.5% annual return. Comparatively, the non-dividend payers struggled to an average annual return of 1.6% over the same stretch.
Of course, not all dividend stocks are created equally. Studies have also shown that higher-yielding stocks can be more trouble than they're worth. But this isn't always the case.
Not only can investors pocket big-time sustainable income from ultra-high-yield dividend stocks -- this is an arbitrary term I'm using to describe stocks with at least a 7% yield -- but they can do so from passive-income powerhouses that provide a payout every single month.
The following two ultra-high-yield dividend stocks are averaging a 10.66% annual yield and can deliver $200 in monthly dividend income with an aggregate initial investment of $22,515 (split equally between the two companies).
NASDAQ: AGNC
Key Data Points
AGNC Investment Corp.: 12.09% yield
The first monthly dividend stock that has the potential to really line income investors' pockets is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC +0.00%). AGNC is yielding a jaw-dropping 12.09%, and the company has sustained a double-digit yield in 12 of the past 13 years.
Without getting overly complicated, mortgage REITs like AGNC aim to borrow money at the lowest short-term rate possible and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBSs). This is how the industry got its name. Ultimately, the wider the gap, known as "net interest margin," between the average yield generated from owned assets minus the average borrowing rate, the more profitable the mortgage REIT.
Income investors love mortgage REITs because it's a very predictable industry. Keeping a close eye on the Federal Reserve's monetary policy and the interest rate yield curve often gives investors the clues they need to determine how well or poorly mortgage REITs are performing.
Currently, AGNC is struggling under the weight of rapidly rising interest rates. This is pushing up short-term borrowing costs and flattening the yield curve, which has a negative effect on the company's book value. But this is also an industry with a lot of history behind it that typically makes for a genius bad-news buy.
Over long periods, rapidly rising interest rates will actually help AGNC. Although it increases short-term borrowing costs, it tends to provide a long-term lift to the yields on the MBSs AGNC Investment acquires. The end result is an expanded net interest margin over time.
Furthermore, while it's common to see panic on Wall Street during steep market declines, the U.S. economy spends far more time expanding than contracting. This leads to the interest rate yield curve steepening (longer-dated bond maturities carrying higher yields than shorter-dated maturities) more often than flattening. This, too, is a long-term boon to AGNC's net interest margin.
The final consideration is that AGNC's asset portfolio is packed with agency securities. "Agency" assets are backed by the federal government in the unlikely event of a default. In short, AGNC's portfolio is de-risked, which allows the company to use leverage to its advantage in order to boost its profit potential.
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PennantPark Floating Rate Capital: 9.23% yield
The second rock-solid ultra-high-yield dividend stock that can help you bring home $200 in monthly dividend income is little-known business development company (BDC) PennantPark Floating Rate Capital (PFLT +1.15%). PennantPark has been doling out a $0.095 monthly dividend for more than seven years.
BDCs are companies that typically invest in the equity or debt of middle-market companies. PennantPark predominantly falls into the latter category. Although 13% of its investment portfolio is tied up in common equity and preferred-stock holdings, nearly every cent of its remaining invested assets (approximately $1.06 billion) is in first-lien secured debt.
Why choose the debt route and not invest in equity? The simple answer is the steady return potential offered by holding middle-market company debt. A middle-market company usually has a market cap of $2 billion or less. These are businesses that aren't necessarily time-tested, and therefore don't have abundant access to the credit market. As a result, PennantPark Floating Rate Capital can generate higher yields on the first-lien secured loans it holds. As of the end of June, the company's debt investment portfolio was generating a weighted-average yield of 8.5%.
NYSE: PFLT
Key Data Points
You might be thinking that focusing on middle-market companies that aren't necessarily proven would result in higher delinquency rates. Yet PennantPark's operating results continue to show otherwise. Including its equity investments and preferred stock, just 0.9% of the company's total investment portfolio at cost -- two of its 123 investments -- was on non-accrual at the end of June.
However, the unquestioned best aspect of PennantPark Floating Rate Capital's operating model is that its entire debt investment portfolio sports variable interest rates. With the Federal Reserve aggressively hiking interest rates to combat historically high inflation, PennantPark should be in a position to generate higher yields on its debt investment portfolio without having to lift a finger.
Lastly, take solace in the fact that all but $0.7 million of the company's $1.062 billion debt investment portfolio is first-lien secured debt. In the event of a default, first-lien debtholders are at the front of the line to collect. This choice by management to invest in first-lien secured debt reduces operating risks for the company and its shareholders.
