One of the easiest, and smartest, ways for investors to increase their chance of building wealth on Wall Street is to buy dividend stocks. Although growth stocks have been favored for much of the past decade, dividend stocks have a knack for outperforming over long periods.
Roughly 10 years ago, J.P. Morgan Asset Management, the wealth management division of leading money-center bank JPMorgan Chase, released a report that compared the performance of companies initiating and growing their payouts between 1972 and 2012 to public companies not offering a dividend over the same time span.
As you might have guessed, income stocks crushed the nonpayers in the return department: 9.5% (annualized) over 40 years for the dividend stocks, versus a meager 1.6% annualized return for the nonpayers over the same four decades.
Image source: Getty Images.
Companies that dole out a regular dividend tend to be profitable on a recurring basis and are typically time-tested. In short, they're businesses we'd expect to increase in value over time.
However, no two dividend stocks are created equally. For instance, higher-yield stocks can come with considerable investment risk -- but this isn't always the case. With proper vetting, investors can receive supercharged, safe income. In fact, outsize dividends can even be had on a monthly basis.
If you want $100 in super safe monthly dividend income, simply invest $11,550 (split equally, three ways) into the following three high-yield stocks, which sport an average yield of 10.39%.
AGNC Investment: 14.23% yield
The first rock-solid income stock that can be counted on to provide $100 in monthly dividend income from an initial investment of $11,550 (split equally, three ways) is mortgage real estate investment trust (REIT) AGNC Investment (AGNC +2.13%). AGNC's 14.2% yield is not only sustainable, but perfectly normal. The company's yield has hovered in the double-digits in 13 of the past 14 years.
A quick look at AGNC's stock performance will, undoubtedly, have some investors cringing. That's because mortgage REITs are facing their toughest climate on record.
NASDAQ: AGNC
Key Data Points
Mortgage REITs aim to borrow money at the lowest possible short-term rate and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The inversion of the Treasury yield curve, coupled with the Federal Reserve's aggressive rate-hiking cycle, have sent short-term borrowing costs notably higher and reduced AGNC's net interest margin. There's no sugarcoating that it's been a difficult environment for mortgage REITs to operate in.
However, there are a couple of reasons to be excited for the future. To begin with, the Treasury yield curve has historically spent a disproportionate amount of its time sloped up and to the right. This is to say that long-dated bonds that mature in 10 or 30 years have higher yields than short-maturing Treasury bills. When the yield curve inversion ends, AGNC should enjoy a healthy expansion of its net interest margin.
To add to the above, higher interest rates are helping to lift the average yield on new MBSs being purchased. Over time, this, too, will be a factor that buoys AGNC Investment's net interest margin.
Furthermore, AGNC's management team has done a top-notch job of protecting the company's $58 billion investment portfolio. All but $1.1 billion is tied up in agency MBSs and to-be-announced mortgage positions. An "agency" asset is backed by the federal government in case of default. Though this added protection does lower the yields AGNC can expect to receive, it also allows the company to lever its portfolio to maximize its profit potential. It's this ability to prudently lever its bets that keeps AGNC's dividend so high.
NYSE: PFLT
Key Data Points
PennantPark Floating Rate Capital: 11.52% yield
A second high-yield stock that can help generate $100 in super safe monthly dividend income from a starting investment of $11,550 (once again, split equally) is business development company (BDC) PennantPark Floating Rate Capital (PFLT +0.37%). PennantPark's monthly payout has increased twice since the year began, and the company is currently doling out a hearty 11.5% yield.
BDCs are businesses that invest in the equity (common or preferred stock) or debt of small- and mid-cap companies (commonly referred to as "middle-market companies"). Though PennantPark does hold almost $155 million in common and preferred equity, the $950.3 million in debt investments it closed out June with makes it a debt-focused BDC. As I've pointed out previously, holding debt in middle-market companies has its advantages.
To begin with, PennantPark has a yield advantage working in its favor. Most middle-market companies are unproven, which means their access to traditional debt and credit markets may be limited. The result for PennantPark is that it achieves above-market rates on the debt it does hold. As of June 30, it had a cool 12.4% weighted average yield on debt investments.
The second advantage for PennantPark Floating Rate Capital can be found in its name. The entirety of its $950.3 million debt portfolio is variable rate. This means every rate hike passed along by the Federal Reserve is increasing PennantPark's net interest income earning potential. Since Sept. 30, 2021, the company's averaged weighted yield on debt investments has soared 500 basis points (7.4% to 12.4%). With the nation's central bank not expected to begin a rate-easing cycle anytime soon, the cash should continue to flow for PennantPark.
The third and final advantage of PennantPark's primarily debt-focused operating model is the class of debt it's chosen to invest in. All but $0.1 million of its $950.3 million in debt investments are first-lien secured. First-lien secured debtholders are first in line for repayment in the event that a borrower seeks bankruptcy protection. Like AGNC, PennantPark's management team has done a good job of protecting the money that's been put to work.
Grocery stores represent one of the top industries Realty Income leases to. Image source: Getty Images.
Realty Income: 5.43% yield
The third high-yield stock that can produce $100 in super safe monthly dividend income with an investment of $11,550 (split equally, three ways) is retail REIT Realty Income (O +0.74%). Realty Income is currently parsing out a 5.4% yield, which is more than 3 times the yield of the benchmark S&P 500.
It'd be difficult to find a safer monthly payer than Realty Income, which has increased its base annual dividend in each of the past 30 years, as well as boosted its quarterly payout for 103 consecutive quarters. That's nearly 26 years of quarterly dividend hikes, for those of you keeping score at home.
The first thing Realty Income brings to the table is its trustworthy lease portfolio. As of the end of 2022, 76% of its commercial real estate properties were service-oriented or non-discretionary retailers that are well protected from economic turbulence and competitive pressures from online retailers. Another 16% of its lease portfolio comes from outside the retail industry. This means more than 9 out of 10 leased real estate properties are capable of generating predictable cash flow in pretty much any economic environment.
NYSE: O
Key Data Points
Realty Income's occupancy rate provides another source of optimism for the company's patient shareholders. Just 137 properties out of the 13,118 properties the company owned or held interests in, as of the end of June, weren't leased. This works out to a portfolio occupancy rate of 99%, with a weighted average length on remaining leases of 9.6 years. Once again, we're talking about highly predictable cash flow.
Lastly, Realty Income's dealmaking ability should excite investors. Management has been making a concerted effort to expand beyond the confines of retail, with the company securing two sizable deals in the gaming industry over the past nine months.
In December, Realty Income closed a $1.7 billion sale-leaseback agreement for the land and real estate assets of Encore Boston Harbor, which is operated by Wynn Resorts. Meanwhile, just over a week ago, it signed an agreement to commit $950 million to a joint venture with Blackstone Real Estate Income Trust that'll own a 95% interest in the real estate assets of the The Bellagio Las Vegas, which is operated by MGM Resorts International. These deals provide new cash-flow opportunities for Realty Income and are helping it diversify its portfolio.
