On one hand, investing in 2022 has been an adventure. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have all declined by more than 20%, which puts all three major U.S. stock indexes firmly in a bear market.
On the other hand, bear markets represent a phenomenal opportunity for patient investors to put their money to work. After all, every major drop in the stock market throughout history has eventually proved to be a buying opportunity (even if it didn't seem like it at the time).
Image source: Getty Images.
It's an especially smart time to consider buying dividend stocks. Companies that pay a regular dividend are almost always profitable and have previously navigated their way through downturns. In short, they're just the type of investment to make in an uncertain economic environment.
Perhaps the best thing about dividend stocks is that they come in a variety of "flavors," including monthly dividend payers. If you were to invest $10,200 (split equally) into the following three ultra-high-yield stocks, which are averaging an 11.77% yield, you'd generate $100 in monthly dividend income.
AGNC Investment: 15.24% yield
The first supercharged dividend stock that can provide a steady dose of monthly income is mortgage real estate investment trust (REIT) AGNC Investment (AGNC 0.55%). AGNC has the highest yield of the stocks on this list (15.4%), and the company has averaged a double-digit yield in all but one of the past 14 years.
Without getting too technical, mortgage REITs are companies that borrow money at short-term lending rates and use this capital to buy higher-yielding long-term assets, such as mortgage-backed securities (MBS). What a company like AGNC is trying to do is widen the difference (known as net interest margin) between the yields generated on owned assets minus the average borrowing rate.
In 2022, operating conditions for mortgage REITs have been abysmal. The Fed's hawkish monetary policy has rapidly increased short-term borrowing rates. Meanwhile, an inverted interest rate yield curve has shrunk book value and net interest margin. The good news, though, is this pain should be temporary.
Although market conditions are trying for AGNC, the company's future MBS purchases should net higher yields as interest rates rise. Further, long-winded economic expansions favor an upward-sloping yield curve. In other words, net interest margin is poised to expand over time.
But the best thing about AGNC might be its investment portfolio. Only $1.7 billion of its $61.5 billion investment portfolio isn't of the agency variety. An "agency" asset is backed by the federal government in the event of default. Though this added protection does lower the yield AGNC Investment receives on the MBSs it buys, it allows the company to use leverage to its advantage.
Horizon Technology Finance.: 10.08% yield
A second ultra-high-yield dividend stock that can pad your pocketbook with $100 each month is Horizon Technology Finance (HRZN -0.52%). Horizon has sustained a double-digit yield for most of the trailing 10-year period and is currently doling out a 10.1% yield.
Horizon is what's known as a business development company (BDC). BDCs come in two forms: those that buy equity and those that buy debt. Horizon falls into the latter category and focuses its purchases on the debt of high-growth, developmental-stage businesses involved in life sciences and renewable energy, among other industries.
The not-to-subtle secret to Horizon Technology Finance's success is its focus on these very early stage companies. Since these businesses often have limited access to credit markets, Horizon is able to generate high yields on the debt it holds. As of the end of September, the company was bringing in a mouthwatering 15.9% annualized yield on its debt investments.
You might think that putting money to work in developmental-stage businesses would be risky. However, the company's prudent due diligence has worked wonders. As of Sept. 30, 2022, 54 of its 57 debt investments were either rated as the highest credit quality or a standard level of risk. In the view of Horizon, just 2.9% of its $609 million in debt investments are at an increased level of risk. That should comfort shareholders in a volatile environment.
And as I've pointed out before, Horizon is unique in the fact that it has an outstanding share repurchase program. Most BDCs and REITs don't repurchase their own stock. Although it's a relatively small repurchase program -- $5 million authorized, of which $1.9 million has been bought back -- buybacks can have a positive impact on shareholder value.
Image source: Getty Images.
PennantPark Floating Rate Capital: 10% yield
The third ultra-high-yield stock that'll help you generate $100 in monthly dividend income is BDC PennantPark Floating Rate Capital (PFLT 0.09%). This little-known BDC has been serving up a $0.095 monthly payout to its shareholders for more than seven years. As of Nov. 10, 2022, this worked out to a 10% yield.
Similar to Horizon Technology Finance, PennantPark's focus is on debt. Though 13% of its assets are tied up in common and preferred stock, the remaining 87% of its portfolio is invested in debt from middle-market companies -- i.e., businesses with market caps of $2 billion or less. PennantPark was sitting on a juicy weighted average yield on its debt investments of 8.5% through June 2022 (the company will report its third-quarter operating results later this week).
There are two key aspects of this debt investment portfolio that investors should be aware of. First, all but $0.7 million of the company's $1.06 billion debt investment portfolio is in first-lien secured debt. In the worst-case scenario event that one of its lenders filed for bankruptcy protection, first-lien secured debtholders are first in line to collect payment. This helps ensures that no one bad investment can sink the proverbial ship.
The other consideration here is that 100% of PennantPark Floating Rate Capital's debt investment portfolio sports variable interest rates. With the Federal Reserve increasing its federal funds target rate six times in 2022 for an aggregate of 375 basis points, it means the company's entire debt investment portfolio is generating higher yields and income without the company having to do a thing.
As for the safety of its investment portfolio, just two companies representing 0.9% of the overall portfolio's cost basis were delinquent on their payments at the midpoint of the year. PennantPark represents a rock-solid, if not boring, way for investors to generate serious monthly income.
