For more than a century, Wall Street has been a bona fide wealth-creating machine. Although other asset classes have delivered nominal gains for investors, including housing, gold, and Treasury bonds, no other asset class comes remotely close to the average annual rate of return that stocks have generated over the last 100 years.
While there is no shortage of strategies that can make long-term investors richer on Wall Street, few match the return potential of buying and holding high-quality dividend stocks.
Last year, the investment advisors at Hartford Funds released a lengthy report ("The Power of Dividends: Past, Present, and Future") examining the many ways dividend stocks have outperformed their non-paying counterparts over many decades. In particular, a collaboration with Ned Davis Research revealed a marked disparity in average annual returns.
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Whereas non-payers produced a modest 4.27% annual rate of return over the last half-century, and did so while being 18% more volatile than the broad-based S&P 500, researchers found that dividend payers averaged a 9.17% annual return over the last 50 years, with 6% less volatility than the benchmark index.
The biggest challenge for income seekers is simply avoiding yield traps -- i.e., companies with struggling/failing operating models whose yields have been artificially inflated by a plunging share price. Previous studies have shown that investment risk and yield tend to correlate.
However, not all ultra-high-yield dividend stocks are created equally. When I say "ultra-high-yield," I'm talking about dividend stocks sporting yields that are four or more times higher than the average yield of the S&P 500 (1.3%, as of July 12). Top-notch and trustworthy ultra-high-yield income stocks do exist, and sometimes they dole out their dividends on a monthly basis!
If you want to collect $1,000 in safe monthly dividend income, simply invest $121,000 (split equally, three ways) into the following three ultra-high-yield monthly payers, which are averaging a 9.92% yield.
Realty Income: 5.66% yield
The first high-octane dividend stock that can help deliver $1,000 in monthly income to investors with a beginning investment of $121,000 (split equally across three stocks) is the premier retail real estate investment trust (REIT), Realty Income (O 0.68%). This is a company that's increased its dividend in each of the last 107 quarters.
Although recessionary concerns persist, and have been fueled by the first meaningful decline in U.S. M2 money supply since the Great Depression, Realty Income's commercial real estate (CRE) portfolio offers a number of well-defined competitive advantages.
NYSE: O
Key Data Points
To start with, approximately 90% of the company's 15,485-property CRE portfolio is "resilient to economic downturns and/or isolated from e-commerce pressures," according to the company. Realty Income predominantly owns stand-alone retail locations in industries that supply basic need goods and services. No matter how well or poorly the U.S. or global economy are performing, consumers are still going to visit grocery chains, dollar stores, drug stores, and automotive service stations. Being mindful of which companies and industries it leases to has resulted in predictable funds from operation (FFO).
To add to this point, Realty Income tends to land lengthy leases with brand-name, time-tested businesses. Whereas the median S&P 500 REIT has had a 94.2% occupancy rate since the start of this century, Realty Income has done 400 basis points better, with a 98.2% occupancy rate. This demonstrates why the company's FFO and dividend growth are so predictable.
However, Realty Income isn't satisfied being dominant in just the retail REIT landscape. In recent years, management has been expanding the company's reach into new channels, including gaming and data centers. Moving beyond retail should further fortify Realty Income's FFO.
The cherry on the sundae for income seekers is that Realty Income's stock is historically inexpensive. Shares can be picked up for 12.4 times forecast cash flow in 2025, which represents a 28% discount to its average multiple to cash flow over the trailing-five-year period.
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PennantPark Floating Rate Capital: 10.31% yield
A second super safe ultra-high-yield monthly payer that can help you bring home $1,000 in monthly income from a starting investment of $121,000 that's been split three ways is business development company (BDC) PennantPark Floating Rate Capital (PFLT +0.59%). PennantPark modestly increased its monthly payout twice in 2023 and is currently yielding north of 10%.
BDCs invest in the equity (common and preferred stock) or debt of what's known as "middle-market companies." These are typically unproven small and microcap businesses. As of the end of March, roughly $1.29 billion of PennantPark's approximately $1.48 billion portfolio was tied up in debt securities, which makes it a primarily debt-focused BDC.
There are three smart reasons PennantPark's management team chose to focus on loans. First off, middle market companies often have limited access to traditional credit and lending markets. When they are able to borrow, it's typically at a rate that's well above the market average. Not surprisingly, PennantPark's weighted-average yield on debt investments of 12.3% is well above average.
Secondly, as the company's name gives away, the entirety of PennantPark Floating Rate Capital's debt-investment portfolio sports variables rates. This is to say that the company's yield on its debt investments ebbs and flows with the Federal Reserve's monetary policy. The most-aggressive rate-hiking cycle since the early 1980s has resulted in a 510-basis-point increase in its weighted-average yield on debt investments since September 2021. The longer the nation's central bank does nothing with its federal funds target rate, the more lucrative it'll be for the company.
NYSE: PFLT
Key Data Points
The third reason focusing on high-yielding debt securities makes sense for PennantPark is because it has a couple of ways to protect its principal investment. On top of maintaining a reasonably low average investment size of $10.1 million, including its equity investments, 99.98% of the company's debt securities are first-lien secured loans. In the event that one of the company's borrowers seeks bankruptcy protection, first-lien secured debtholders are first in line for repayment.
At less than 10 times forward-year earnings per share, PennantPark remains a bargain among monthly dividend payers.
AGNC Investment: 13.78% yield
The third safe, ultra-high-yield dividend stock that can allow you to collect $1,000 each month from an initial investment of $121,000 that's split three ways is mortgage REIT AGNC Investment (AGNC +0.43%). AGNC has averaged a double-digit yield in 13 of the last 14 years, which means its nearly 14% yield isn't out of the ordinary.
Mortgage REITs are businesses that aim to borrow at low, short-term lending rates, and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The difference between the average yield mortgage REITs net on the assets they own, less their average borrowing rate, is known as "net interest margin." The higher their net interest margin, usually the more profitable the mortgage REIT.
NASDAQ: AGNC
Key Data Points
For as long as I can remember, mortgage REITs like AGNC have been almost universally disliked by Wall Street. These are interest-sensitive businesses that have been hurt by the Fed's rapid changes in monetary policy, as well as the longest yield-curve inversion of the modern era. However, history has shown that when things seem their grimmest for mortgage REITs is precisely when they make for a fantastic buy.
For instance, the Treasury yield curve historically slopes up and to the right. This is to say that bonds maturing 30 years from now are going to offer higher yields than Treasury bills maturing in a year or less. When the yield curve eventually normalizes, AGNC Investment should enjoy a widening of its net interest margin.
Furthermore, it shouldn't be overlooked that the nation's central bank is no longer purchasing MBSs. Not having to compete against the Fed for higher-yielding MBSs should be a positive for AGNC's average yield on its owned assets.
Lastly, AGNC's investment team relies almost exclusively on agency assets. "Agency" securities, which comprised all but $1.1 billion of AGNC's $63.3 billion investment portfolio, as of March 31, are backed by the federal government in the unlikely event of a default. This added protection is what allows AGNC to lever its investments and sustain its outsized dividend.
