For well over a century, Wall Street has been a wealth-building machine. Though there is no shortage of pathways to grow your wealth in the stock market, few strategies have proved more fruitful over long periods than buying and holding high-quality dividend stocks.
Companies that pay a dividend to their shareholders on a regular basis are:
- Usually time-tested and have demonstrated their ability to navigate turbulent economic climates.
- Profitable on a recurring basis, which is what facilitates regular dividend payments.
- Capable of providing transparent long-term growth outlooks.
But perhaps the most-defining of all characteristics for top-tier income stocks is their long-term outperformance.
Image source: Getty Images.
In The Power of Dividends: Past, Present, and Future, the analysts at Hartford Funds, in collaboration with Ned Davis Research, compared the performance of dividend stocks to non-payers over a half-century (1973-2023). What they found was a night-and-day difference in performance, with companies paying a dividend more than doubling up the return on non-payers on an annualized basis: 9.17% vs. 4.27%.
The good news for income seekers is you don't have to wait three months to receive a payout. For those looking for more instant gratification, there are dozens of stocks doling out monthly dividends. Among these is a trio of safe, ultra-high-yield dividend payers -- yielding an average of 10.25% -- capable of generating $300 in monthly dividend income from a starting investment of $35,125 (split equally, three ways).
AGNC Investment: 13.99% yield
The first ultra-high-yielding stock capable of generating $300 in monthly dividend income is none other than mortgage real estate investment trust (REIT) AGNC Investment (AGNC +1.75%). AGNC's 14% dividend yield isn't a glitch, with the company averaging a double-digit yield in 14 of the last 15 years.
There might not be an industry that's been more universally disliked by Wall Street analysts than mortgage REITs. The reason being it's a highly interest-sensitive industry that typically performs poorly when interest rates are rapidly climbing, as occurred from March 2022 through July 2023. The historic inversion of the Treasury yield curve hasn't helped, either.
NASDAQ: AGNC
Key Data Points
But in spite of these challenges, the worst for AGNC Investment looks to be in the rearview mirror. With the prevailing rate of inflation well off of its 9.1% peak, the Federal Reserve have shifted to a rate-easing cycle. Mortgage REITs historically perform well during rate-easing cycles, largely due to the fact that it reduces short-term borrowing costs and can widen their net interest margin.
Even more important, the nation's central bank is slow-stepping any changes to the federal funds rate and its monetary policy. The more transparent and telegraphed the Fed is, the greater the opportunity for AGNC to adjust its asset portfolio to maximize returns.
Another key to AGNC Investment's success is its laser focus on agency assets. An "agency" security is backed by the federal government in the unlikely event of default. While this added level of protection does reduce the yield AGNC nets on the mortgage-backed securities (MBS) it purchases, it also allows the company to lever its MBS investments to maximize its profits and sustain its outsized dividend yield.
If Fed policy remains predictable and the Treasury yield curve steepens over time, AGNC's book value and net interest margin should both increase.
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Realty Income: 5.7% yield
A second ultra-high-yield dividend payer that can help produce $300 monthly from a starting investment of $35,125 split three ways is premier retail REIT, Realty Income (O 0.09%). Realty Income has increased its dividend for 110 consecutive quarters.
What makes this company so special is the composition of its vast commercial real estate (CRE) portfolio. When 2024 came to a close, it owned north of 15,600 CRE properties, an estimated 91% of which were deemed to be "resilient to economic downturns and/or isolated from e-commerce pressures."
Realty Income primarily focuses on leasing to brand-name, stand-alone businesses that draw foot traffic in any economic climate. According to the company's year-end breakdown, more than a quarter of its annualized contractual rent can be traced to convenience stores, grocery stores, and dollar stores, which sell basic necessities.
The company's management team also deserves credit for the rock-solid vetting of its tenants and the lengthy leases it secures. Rental delinquencies tend to be low, and its historic median occupancy rate of 98.2% is 400 basis points above the historic median occupancy rate for S&P 500 REITs.
NYSE: O
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In addition to dominating the retail REIT landscape, Realty Income has been expanding its horizons and moving into new verticals. It orchestrated two deals in the gaming industry, acquired Spirit Realty Capital in January 2024, and formed a joint venture with Digital Realty Trust for build-to-suit data centers to take advantage of the artificial intelligence revolution.
The cherry on the sundae is that Realty Income is historically cheap, relative to its future cash flow.
PennantPark Floating Rate Capital: 11.06% yield
The third ultra-high-yield stock that can help you collect $300 in safe monthly dividend income with a beginning investment of $35,125 (split in thirds) is little-known business development company (BDC) PennantPark Floating Rate Capital (PFLT +0.56%). Based on its current monthly payout, PennantPark's yield is north of 11%.
BDCs typically invest in the equity (common and preferred stock) and/or debt of middle-market companies -- i.e., small and often unproven businesses. Though PennantPark does hold nearly $227 million in common and preferred equity, its $1.96 billion debt portfolio points to it being a debt-focused BDC.
NYSE: PFLT
Key Data Points
The advantage of focusing on debt investments has to do with yield. Since most middle-market companies have limited access to basic financial services, they're usually going to pay a premium rate on their loans. As of the December-ended quarter, PennantPark was netting a 10.6% weighted average yield on its debt investments.
However, the beauty of PennantPark Floating Rate Capital's operating model is in its name. The entirety of its $1.96 billion debt portfolio is variable rate. When the nation's central bank undertook its aggressive rate-hiking cycle between March 2022 and July 2023, it sent the company's weighted average yield on debt investments considerably higher. Even with the Fed now in a rate-easing cycle, it's taking its sweet time reducing rates and providing PennantPark with plenty of opportunity to pack its portfolio with higher-yielding loans.
Furthermore, this is a company that's done an excellent job of protecting its principal. Despite putting its money to work in mostly unproven businesses, only two companies were delinquent, as of Dec. 31, equating to just 0.4% of the total portfolio on a cost basis.
With PennantPark Floating Rate Capital stock trading at a 2% discount to its book value, now is the perfect time for income seekers to pounce.
