With thousands of publicly traded companies and exchange-traded funds to choose from, Wall Street offers investors a seemingly endless array of strategies to grow their wealth. But when the numbers are crunched, it's tough to consistently beat the annualized return of high-quality dividend stocks over the long run.
Roughly 10 years ago, the wealth management segment of America's largest money-center bank by assets, JPMorgan Chase, released a report that examined the performance of companies initiating and growing their payout over 40 years (1972-2012) to public companies not paying a dividend over the same span. The difference in annualized returns was night and day.
Whereas the income stocks delivered a meaty annualized return of 9.5% over four decades, the non-payers produced a measly annualized return of just 1.6%.
These results shouldn't surprise anyone. Companies that pay a regular dividend are almost always profitable on a recurring basis and time-tested. What's more, they can usually offer transparent long-term growth outlooks.
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But this doesn't mean all dividend stocks are created equally. Ultra-high-yield dividend stocks -- those with yields around four or more times higher than the S&P 500 -- can occasionally be more trouble than they're worth. Thankfully, careful vetting can uncover some true gems on the income front -- some of which pay their dividends on a monthly basis!
If you're looking to generate $200 in monthly dividend income in 2024, simply invest $27,000 (split equally, three ways) into the following ultra-high-yield trio, which sport an average yield of 8.9%!
Realty Income: 5.7% yield
The first high-octane income stock capable of generating $200 in monthly income from a beginning investment of $27,000 that's split in thirds is retail real estate investment trust (REIT) Realty Income (O -0.17%). To give you some idea of what a payout juggernaut Realty Income is, the company has increased its distribution in each of the past 104 quarters.
As you might imagine, some investors are concerned about the state of the U.S. economy. Although the unemployment rate remains historically low, certain money-based metrics portend the possibility of a recession next year. People tend to pare back their discretionary spending during recessions, which wouldn't be good news for retailers or the REITs leasing to retailers.
There are, however, a couple of competitive advantages Realty Income brings to the table, which should help it navigate whatever the U.S. economy throws its way.
The most important aspect of Realty Income's over 13,000-commercial-property portfolio is that more than 9 out of 10 leased properties are from sectors and industries that are resilient to economic downturns. For instance, a little over 35% of the company's annualized contractual rent can be traced to grocery stores, convenience stores, dollar stores, and drug stores. These stores provide basic-need products and services, which means people will visit them in any economic climate.
Something else to consider about Realty Income is that it's constantly diversifying its operations. In late October, it announced plans to acquire Spirit Realty Capital in an all-share deal valued at $9.3 billion. Spirit's commercial real estate portfolio will complement the diversity of Realty Income's asset portfolio, and expand the combined company into new industries.
What's more, Realty Income has shifted into gaming, with two significant deals over the past year. Diversifying its real estate portfolio will make it even less reliant on the ebbs and flows of the U.S. economy.
Realty Income's occupancy rate is also far superior to its peers'. Realty Income's portfolio has produced an average occupancy rate of 98.2% since the start of 2000. That compares to an average occupancy rate for the median REIT of 94.2% over the same timeline. The predictability of its adjusted funds from operations is simply unmatched among retail REITs.
PennantPark Floating Rate Capital: 10.71% yield
A second ultra-high-yield stock that can help you bring home $200 each month in 2024 is business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.61%). PennantPark has increased its monthly payout twice since the year began.
BDCs are businesses that invest in either the debt or equity of middle-market companies (typically micro-cap and small-cap businesses). Despite ending September with nearly $161 million in common and preferred stock in its portfolio, the more than $906 million in debt securities held makes PennantPark a primarily debt-focused BDC.
The clear advantage of a debt-driven operating model is the yield PennantPark receives. Since most micro-cap and small-cap companies are unproven, they have limited access to traditional debt and credit markets. This means any financing they do receive tends to sport high yields. As of the end of September, PennantPark's weighted average yield on debt investments was a whopping 12.6%!
What's even more important is that the entirety of PennantPark Floating Rate Capital's debt-securities portfolio has variable interest rates. Since March 2022, the Federal Reserve has increased the federal funds target rate by 525 basis points. Each rate hike is padding PennantPark's proverbial pockets, as evidenced by its 520-basis-point improvement in weighted average yield on debt investments since Sept. 30, 2021. As long as the nation's central bank remains hawkish, PennantPark and its shareholders will benefit.
Another reason income investors can place their trust in PennantPark is the company's principal protection strategy. It almost exclusively owns first-lien secured debt -- just $0.1 million of its $906.3 million debt securities portfolio isn't first-lien secured. First-lien secured debtholders are first in line for repayment in the event that a borrower seeks bankruptcy protection.
Additionally, PennantPark is invested in 131 companies, including its equity stakes. No single investment is critical to PennantPark's success, nor capable of seriously hurting its operating performance.
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Horizon Technology Finance: 10.28% yield
The third ultra-high-yield stock that can help you receive $200 in monthly dividend income in 2024 from an initial investment of $27,000 (split equally, three ways) is BDC Horizon Technology Finance (HRZN 0.95%). Horizon's yield has hovered around the 10% mark for much of the past decade.
Horizon's operating model is similar to PennantPark Floating Rate Capital's, but with a few twists. In particular, Horizon Technology Finance is primarily dealing with developmental-stage companies in exclusively high-growth fields, such as technology, life sciences, and renewable energy. Though there's certainly risk involved when investing in developmental-stage businesses, there's also plenty of reward when those businesses are properly vetted.
As of the end of September, Horizon had around $49 million invested in an assortment of equity stakes and warrants. But like PennantPark, it has $680 million in debt securities, which makes it a debt-driven BDC.
Having an aforementioned focus on developmental-stage businesses has led to significantly higher yields. Since Horizon is offering financing to unproven companies, it ended the third quarter with a dollar-weighted annualized yield on its debt investments of 17.1%. That's roughly four times higher than the current yield on 10-year Treasury notes.
Despite macro challenges, Horizon Technology Finance has also done a stand-up job of protecting its principal. Though higher interest rates have increased the delinquency rate for developmental-stage businesses, 86.5% of the company's debt investments at fair value are tied up in businesses Horizon deems to have high credit quality or offer standard levels of risk.
To build on the above, a good portion of Horizon's debt securities have variable interest rates. A big uptick in income from the 86.5% of its debt portfolio that isn't a concern as interest rates have risen has more than offset any potential losses from its other debt securities.
