Historically speaking, when volatility picks up on Wall Street, smart investors turn their attention to dividend stocks. While not all income stocks are guaranteed moneymakers, dividend stocks, collectively, have proved to be long-term outperformers.
In 2013, J.P. Morgan Asset Management, a division of money-center bank JPMorgan Chase, released a study that compared the performance of publicly traded companies that initiated and grew their payouts between 1972 and 2012 to public companies that didn't offer a payout over the same timeline. J.P. Morgan Asset Management's analysis showed an average annual return of 9.5% over four decades for the income stocks and a meager 1.6% annualized return for the non-payers.
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Companies that offer a regular dividend to their shareholders are usually profitable on a recurring basis and time-tested. In short, they can be the ideal investment for those who shy away from market volatility and uncertainty.
But you don't have to settle for just any dividend stock. There are a small number of supercharged income stocks doling out monthly payments that have annual yields in excess of 10%. If you were to invest $9,300 (split equally) in the following two ultra-high-yield income stocks, which average a 12.95% yield, you'd net $100 in monthly dividend income.
AGNC Investment: 14.22% yield
The first high-octane income stock that can deliver a juicy monthly payout is mortgage real estate investment trust (REIT) AGNC Investment (AGNC 2.34%). AGNC's 14.2% yield isn't a typo, with the company parsing out a double-digit yield in 13 of the past 14 years.
Mortgage REITs are businesses that aim to borrow money at the lowest short-term lending rate possible and use this capital to purchase higher-yielding long-term assets. These higher-yielding long-term assets tend to be mortgage-backed securities (MBSs), which is how the mortgage REIT industry gets its name.
NASDAQ: AGNC
Key Data Points
What makes mortgage REITs so attractive is that their operating performance is highly predictable. These are yield-curve-sensitive businesses. In other words, keeping a close eye on the Treasury yield curve and the Federal Reserve's monetary policy actions can give investors a good bead on the performance of mortgage REITs.
For AGNC, the past two years have been incredibly challenging. An inverted yield curve has increased short-term borrowing costs and reduced its net interest margin -- i.e., its average yield on assets owned minus its average borrowing rate. But history suggests AGNC will, eventually, come out of this mess smelling like a rose.
Historically, the yield curve spends most of its time sloping up and to the right, with longer-dated bonds sporting higher yields than those maturing in months or a couple of years. When the U.S. economy eventually finds its footing, a return to this ascending yield curve will expand AGNC's net interest margin.
Furthermore, the current rate-hiking cycle isn't all bad news for AGNC Investment. The company's ongoing MBS purchases have juicier yields, which are reducing the speed of prepayments and, over time, can lift its net interest margin.
Additionally, AGNC almost exclusively purchases agency securities. An "agency" asset is backed by the federal government in the event of a default on the underlying security. While this added protection does lower the yield AGNC receives on the MBSs it purchases, it also affords the company the ability to lever its bets and boost its income potential.
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PennantPark Floating Rate Capital: 11.67% yield
A second monster dividend stock that can collectively allow you to generate $100 in monthly income from an initial investment of $9,300 (split equally) is business development company (BDC) PennantPark Floating Rate Capital (PFLT 2.64%). PennantPark has increased its monthly distribution twice over the past year and is currently yielding almost 11.7%.
BDCs invest in middle-market companies (predominantly small- and micro-cap businesses) and fall into two categories: debt-focused and equity-focused. Although PennantPark was holding $157.2 million in common and preferred stock as of the end of March 2023, the $1.01 billion in debt investments held clearly makes it a debt-focused BDC.
One of the clearest advantages for debt-focused BDCs can be seen in the yields they net on their investments. Most small- and micro-cap companies are unproven, and therefore have very limited access to traditional debt and credit markets. Companies like PennantPark know this, which allows it to net above-average yields on the debt investments it holds. As of March 31, PennantPark's weighted average yield on debt investments was an inflation-topping 11.8%.
NYSE: PFLT
Key Data Points
However, the best aspect of this business is the composition of its debt investment portfolio. Every cent of its $1.01 billion in debt investment is of the variable-rate variety. Every rate hike by the Federal Reserve increases the borrowing rate on outstanding variable-rate loans. Between Sept. 30, 2021, and March 31, 2023, PennantPark's weighted average yield on debt investments surged from 7.4% to the aforementioned 11.8%. With the nation's central bank predicting a couple of additional hikes still to come, PennantPark can expect its profit needle to point even higher.
What's more, PennantPark has done a rock-solid job of diversifying its portfolio and ensuring that no single investment can sink its proverbial ship. As of the end of March, it held investments in 130 companies, including common and preferred stock, which equated to an average investment size of just $9 million.
To add to the above, all but $0.1 million of PennantPark's $1.01 billion debt investment portfolio is first-lien secured. First-lien secured debt is first in line for repayment in the event that one of its debtors seeks bankruptcy protection. This is just another way the company has protected itself and its steady income stream.
With only four of its debtors delinquent on their payments, which represents a mere 2% of the company's portfolio cost basis, PennantPark appears ripe for additional upside.
