For patient investors, Wall Street is a pathway to riches. While there are countless strategies that allow long-term investors to grow their wealth, buying and holding dividend stocks has yielded big-time rewards.
In 2013, J.P. Morgan Asset Management, the wealth management segment of well-known money-center bank JPMorgan Chase, released a study that compared the performance of dividend-paying companies to those not doling out a dividend to their shareholders over a 40-year stretch (1972-2012). This comparison produced night-and-day differences in the return column.
Over four decades, the publicly traded companies that had initiated and grown their payouts generated an annualized return of 9.5%. Meanwhile, those companies without a dividend struggled to a mere 1.6% annualized return over the same period.
These results aren't surprising. Companies that pay a regular dividend are usually profitable on a recurring basis, time-tested, and can offer transparent long-term growth outlooks.
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But not all dividend stocks are the same. For impatient income seekers, there are a few dozen companies that pay their dividends on a monthly basis. While not all monthly income stocks are worth buying, some stand out for all the right reasons.
If you want to generate $300 in super-safe monthly dividend income, all you'd need to do is invest $37,800 (split equally, three ways) into the following three ultra-high-yield stocks, which sport an average yield of 9.52%!
Realty Income: 6.08% yield
The first exceptionally safe ultra-high-yield stock that can help produce $300 in monthly income from a starting investment of $37,800 (split three ways) is retail real estate investment trust (REIT) Realty Income (O -0.17%). Realty Income's board has OK'd 104 consecutive quarterly dividend increases, and the company has raised its base annual distribution for more than a quarter of a century.
Realty Income's stock recently fell to a more than three-year low, largely due to poor sentiment concerning commercial real estate. With more people purchasing goods online, and a handful of economic indicators forecasting a U.S. recession in the not-too-distant future, the expectation is that retail REITs could struggle.
However, Realty Income isn't your average retail REIT. It's the model that other companies only wish they could emulate.
The primary reason Realty Income is such a successful business is the diversification of its property portfolio. Approximately 77% of the company's leases are to non-discretionary, low-price-point businesses where consumer demand is relatively inelastic. Another nearly 15% of its leased portfolio comes from the industrial sector. In other words, more than nine out of 10 leases are to companies that are resistant to economic downturns, such as convenience stores, grocery stores, dollar stores, and drug stores.
Something else for investors to hang their hat on is Realty Income's pricing power as a landlord. In the face of an above-average inflation rate, Realty Income reported a rent recapture rate of 106.9% during the third quarter and 104.3% through the first nine months of 2023. This respective 6.9% (in Q3) and 4.3% (through the first nine months) increase in annualized contractual rent outpaces the prevailing rate of inflation for a company whose 13,282 commercial real estate properties sport a healthy 98.9% occupancy rate.
Realty Income's management team hasn't been afraid to make splashy moves to grow the company's bottom line, either. It's expanded into the gaming industry over the past year, and just last week announced the all-share acquisition of Spirit Realty for $9.3 billion. The latter complements Realty Income's existing portfolio, provides even more industry diversification, and will be accretive to annualized adjusted funds from operation.
Horizon Technology Finance: 10.99% yield
A second ultra-high-yield stock that can help you bring in $300 in super-safe monthly income from a beginning investment of $37,800 (split equally among three stocks) is Horizon Technology Finance (HRZN 0.95%). Horizon's stock has hovered around a 10% yield for much of the past decade.
Horizon Technology Finance is a specialty investment company with a focus on developmental-stage companies in high-growth industries, such as technology, renewable energy, and life sciences. Although it holds a little over $49 million in various equity and warrant stakes in dozens of companies, the vast majority of its $729 million investment portfolio ($679.8 million) consists of debt investments.
Offering debt financing to developmental-stage companies isn't without risk. Businesses that aren't time-tested may not succeed, which has the potential to result in partial or complete losses of Horizon's principal investment.
But there are also perks to this strategy. The biggest advantage for Horizon Technology Finance is the yield it generates. Since most unproven businesses have very limited options in traditional debt and credit markets, Horizon was netting a dollar-weighed annualized yield on its average debt investment of 17.1%, as of the end of September. This absolutely crushes the prevailing inflation rate and the yields on short-term Treasury bills.
To add to the above, most of Horizon's debt investments sport variable rates. With the Federal Reserve increasing interest rates at the fastest pace in four decades, Horizon has enjoyed a hearty jump in its annualized yield.
As you might expect, higher rates have been challenging for some developmental-stage companies. Based on Horizon's own loan-quality scale, the percentage of its nearly $680 million in debt investments at increased or high risk of loss of principal has increased to 13.5% as of Sept. 30, 2023, from just 5.1% as of Dec. 31, 2022. Nevertheless, 49 of the company's 56 debt investments sport high credit quality or standards levels of risk. A well-diversified portfolio, coupled with higher weighted yields, can more than offset a couple of potential delinquencies.
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PennantPark Floating Rate Capital: 11.5% yield
The third ultra-high-yield stock that can help you net $300 in super-safe monthly dividend income from a $37,800 investment (split in thirds) is business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.61%). PennantPark has increased its monthly dividend twice since the year began and is currently yielding 11.5%.
The operating model for PennantPark is somewhat similar to Horizon Technology Finance. The difference is that PennantPark isn't solely focused on high-growth, developmental-stage businesses. It primarily holds investment debt from middle-market companies -- microcap and small-cap businesses with market caps below $2 billion.
Like Horizon, PennantPark benefits from the fact that financing options are often limited to smaller businesses. As of June 30, it was netting a 12.4% weighted average yield on its debt investments.
But what's really working in PennantPark Floating Rate Capital's favor, if its name hasn't already given it away, is that 100% of its $950.3 million debt investment portfolio is variable-rate. An aggregate 525-basis-point increase in the federal funds target rate since March 2022 has lifted PennantPark's weighted average yield on debt investments by 500 basis points (7.4% to 12.4%). With the Fed unlikely to ease rates anytime soon, this weighted average yield on debt investments could move even higher.
Another reason to trust PennantPark's rock-solid dividend is the steps its management team has taken to protect the company's invested capital. Just $0.1 million of the company's $950.3 million debt investment portfolio isn't first-lien secured debt. If one of the company's borrowers were to seek bankruptcy protection, first-lien secured debtholders are first in line for repayment.
Furthermore, PennantPark has invested in 130 companies, including its common stock and preferred stock positions. Its average investment of $8.5 million means no single company can rock the proverbial boat.
PennantPark Floating Rate Capital is currently trading below its net asset value per share of $10.96, which makes it a no-brainer buy for patient income seekers.
