There are a lot of ways to make money on Wall Street. However, few strategies have a better long-term track record of making investors richer than buying and holding high-quality dividend stocks.
In 2023, Hartford Funds released an extensive report ("The Power of Dividends: Past, Present, and Future") that examined the ins and outs of how dividend stocks have outperformed over long stretches. In collaboration with Ned Davis Research, Hartford Funds found that dividend payers averaged an annual return of 9.18% over a half-century (1973-2022). By comparison, companies that didn't offer a payout to their shareholders produced an average annual return of just 3.95%.
The not-so-subtle secret to the success of dividend payers is that they're almost always profitable on a recurring basis, time-tested, and can provide transparent long-term growth outlooks. The more a company can look into the future and offer accurate forecasts, the more likely Wall Street and investors will reward that business with an increasingly higher market value.
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For income investors, the challenge is simply balancing yield and risk. While higher yields are desirable, they also come with added risk. The good news is that with proper vetting, rock-solid dividend stocks with supercharged yields can be uncovered.
Best of all, some of these steady dividend stocks parse out their payments on a monthly basis! If you're looking to generate $300 in super-safe monthly dividend income, simply invest $32,000 (split equally, three ways) into the following three ultra-high-yield stocks, which are averaging an 11.28% yield.
AGNC Investment: 15.34% yield
The first monthly dividend payer that can deliver a scorching-hot payout is none other than mortgage real estate investment trust (REIT) AGNC Investment (AGNC 0.97%). AGNC has averaged a double-digit yield in 13 of the past 14 years, which means its current yield of 15% isn't a red flag for income seekers.
In simple terms, mortgage REITs look to borrow money at the lowest possible short-term rate and use this capital to purchase higher-yielding long-term assets. These "long-term assets" are often mortgage-backed securities (MBS), which is how the industry got its name.
Mortgage REITs are highly sensitive to rapid or sizable changes in interest rates and the Treasury bond yield curve. The fastest rate-hiking cycle in four decades, coupled with what looks to become the longest yield-curve inversion on record, have walloped AGNC's net interest margin and lowered the value of its assets. While this is far from an ideal scenario for the mortgage REIT industry, proverbial green shoots are emerging.
The key to success for mortgage REITs is that monetary policy and changes in the yield curve are slow-stepped. This looks to be the strategy in 2024.
Furthermore, the Treasury bond yield curve has spent a disproportionate amount of time sloped up and to the right over the long run. This is to say that longer-dated bonds have higher yields than shorter-maturing bills. As the yield curve normalizes, investors can expect AGNC's book value and net interest margin to meaningfully expand.
Don't overlook the importance of the Federal Reserve's monetary tightening cycle, either. Even though a higher-rate environment tends to be less desirable for mortgage REITs than lower interest rates, a quantitative tightening cycle means the Fed is no longer buying MBS. In other words, AGNC has less competition for potentially lucrative MBS that now sport higher yields.
The final selling point for AGNC is that it almost exclusively invests in agency securities. Just $1.1 billion of its $60.2 billion investment portfolio is exposed to credit-risk transfer and non-agency assets. "Agency" securities are backed by the federal government in the event of default and provide an added layer of protection for the company's investments.
PennantPark Floating Rate Capital: 11.02% yield
A second ultra-high-yield stock that can help you bring home $300 each month from an initial investment of $32,000 (split three ways) is business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.61%). The company raised its monthly payout twice last year.
Without getting too far into the weeds, BDCs make money by investing in the equity (common and preferred stock) and/or debt of middle-market companies. I'm talking about predominantly private, small-cap, and microcap businesses.
As of Sept. 30, 2023, PennantPark had more than $900 million invested in various debt securities, with close to $161 million put to work on the equity side of the equation. This means it's primarily a debt-focused BDC.
The reason BDCs tend to prioritize debt securities is because of the yield they can receive. Unproven businesses rarely have full access to traditional debt and credit markets. When middle-market companies do gain access to financing, it's often at rates that are well above the market average. As of September, PennantPark was enjoying a 12.6% weighted average yield on debt investments.
But it's not just a higher-than-average yield that makes PennantPark's debt portfolio so tantalizing from an investment perspective. Something else that's key to its success is that 100% of its debt securities have variable rates.
Every time the nation's central bank raised its federal funds target rate, the interest rate on the outstanding loans PennantPark holds rose, too. On a trailing-two-year basis beginning Sept. 30, 2021, PennantPark's weighted average yield on debt investments rose by 520 basis points to the noted 12.6%.
Management has made a concerted effort to protect its company's principal, as well. Including equity stakes, the company's roughly $1.07 billion portfolio is spread across 131 companies, which equates to an average of $8.1 million per investment. No single investment is vital to the company's success.
Further, 99.99% of its debt securities are first-lien secured loans. First-lien secured debtholders are at the front of the line for repayment in the event that a borrower seeks bankruptcy protection.
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LTC Properties: 7.48% yield
The third ultra-high-yield stock that can help you generate $300 in monthly dividend income from a starting investment of $32,000 (split equally across three stocks) is healthcare real estate investment trust (REIT) LTC Properties (LTC 1.18%). The company's 7.5% yield is nearing a two-decade high.
Although most sectors and industries were hampered in some way by the COVID-19 pandemic, it was a particularly challenging period for healthcare REITs that were focused on senior housing and senior-care facilities. Aged Americans were hit particularly hard during the initial stages of the pandemic, which led to serious concerns about whether or not LTC's tenants and borrowers could pay their bills. A couple of these companies are still struggling to recover today.
However, the sign of successful REITs and rock-solid management teams is the ability to work through adversities. Despite navigating a challenging climate, LTC has successfully divested some of its assets, reworked some of its master-lease agreements, and moved some of its troubled leases to new tenants to shore up its funds from operations (FFO).
It's also operating in an industry where time is most definitely on its side. The baby boom of the late-1940s through the mid-1960s in the U.S. has created the perfect scenario to command higher lease prices on senior-focused facilities and housing as Americans age.
Something else worth noting is that LTC Properties is actually benefiting from the Federal Reserve's aggressive rate-hiking cycle. While it does lease healthcare facilities for extended periods, LTC Properties also provides mortgages and mezzanine loans. With the federal funds' target rate climbing by 525 basis points in under two years, the company has been able to generate higher interest income from its various loan products.
Lastly, the company's property portfolio is well-diversified. As of early January, it held 200 properties in 27 states that spanned 30 operating partners. Like PennantPark, it's reduced its reliance on any single partner or investment.
