It has been a challenging year for both professional and regular investors. Since the beginning of the year, both the broad base S&P 500 and dependent on technology Nasdaq Composite have fallen into bear market territory. Adding to these challenges, the US economy has contracted in consecutive quarters and several leading companies in the industry have lowered their growth prospects, at least in the short term.
But there is a silver lining to this confusion. No matter how volatile stocks may seem in the short term, every dip, correction, and bear market throughout history (barring the current bear market) has been erased by a bull market rally. In other words, big dips are a red carpet opportunity for patient investors to seize.
Arguably the best deals right now can be found between dividend stocks. Companies that pay dividends regularly are almost always profitable on a recurring and time-tested basis, that is, they have proven their ability to weather economic downturns and downturns.
What’s more, income stocks have a long history of circling their non-paying peers. A JP Morgan Asset Management report published in 2013 found that companies that start and increase their payments over a 40-year period (1972-2012) averaged a 9.5% annual return. As for non-paying stocks, they achieved just a 1.6% annualized return over the same time period.
But not all dividend stocks are created equal. Some have the potential to provide secure monthly income that crushes inflation. The following three ultra-high-yield dividend stocks have an average… averaging…an annual return of 9.73% and distributes payments to its shareholders every month. If you want to earn $300 in monthly income, you only need to invest $37,000, divided equally, between these three supercharged monthly payers.
AGNC Investment Corp.: 11.27% return
The first ultra-high-yield dividend stock to offer a monstrous monthly payment is the mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC -1.34%). AGNC’s nearly 11.3% return is, in fact, the highest on this list, and the company has averaged double-digit returns in 12 of the last 13 years.
Although the products that mortgage REITs purchase can be somewhat complex, the operating model for this industry is very easy to understand. Mortgage REITs like AGNC seek to borrow money at the lowest possible short-term rate and purchase higher-yielding long-term assets. These long-term assets tend to be mortgage-backed securities (MBS), which is how the industry got its name. The larger the gap (known as “net interest margin”) between the average return received on owned assets minus the average loan rate, the more profitable the mortgage REIT often is.
As I noted earlier, what makes AGNC a favorite among income seekers is the predictability of the mortgage REIT industry. By closely monitoring the monetary policy of the Federal Reserve and the interest rate yield curve It will pretty much tell investors everything they need to know about how well or poorly the industry is performing.
To be totally blunt, AGNC has faced a mountain of headwinds since the beginning of the year. Parts of the yield curve have inverted and the Federal Reserve is aggressively raising interest rates to control historically high inflation. Both of these factors have influenced AGNC’s book value (mortgage REITs often trade close to book value) and net interest margin.
But there’s good news: Mortgage REITs are among the stock market’s top bad-news buy candidates. For example, while higher interest rates increase short-term borrowing costs for AGNC, so do will increase the returns generated by the MBS purchased over time. To add to this point, the US economy spends much more time expanding than contracting, which favors a yield curve that slopes up and to the right most of the time. In short, the numbers game suggests that patient investors will prevail.
As a final point, AGNC Investment buys almost exclusively agency securities. An “agency” asset is one that is protected by the federal government in the event of default. This added protection gives AGNC the ability to deploy leverage to increase your profits.
PennantPark Floating Rate Equity: 9.25% Yield
The Second Ultra High Yield Dividend Stock That Can Help You Generate $300 In Monthly Income Is Little Known business development company (BDC) PennantPark Floating Rate Capital (PFLT -1.47%). PennantPark’s monthly payment has been pegged at $0.095 for more than seven years, and the company currently returns about 9.3%.
PennantPark’s investment portfolio of $1.23 billion consists of a variety of investments. About 13% of its capital is tied up in preferred shares and common shares. The remaining 87% is made up almost entirely of first-tier secured debt from midsize companies, with a fractional percentage linked to second-tier secured debt.
A “middle market company” is typically a publicly traded company with a market capitalization of less than $2 billion. Since most small caps are not profitable and/or time tested, your access to lines of credit/debt may be limited. PennantPark is more than happy to provide Tier 1 secured loans to vetted businesses because it knows you can earn a handsome return on that debt. At the end of June, the company’s $1.06 billion debt investment portfolio was generating a whopping 8.5% return.
Something else to note is PennantPark’s choice of practically only deals with first lien secured debt. In the event of default, first lien secured debt holders are first in line for payment. Mind you, I’m not saying late payments are a good thing for PennantPark. Rather, I am making the case that your debt portfolio has been prudently curtailed.
Another advantage at the top of PennantPark Floating Rate Capital is the investment quality of the company’s portfolio. At the end of June, only two of the 123 companies in which PennantPark had invested did not accumulate income (ie, delinquent). This represented a microscopic 0.9% and 0.1% of the company’s portfolio on a cost and value basis, respectively.
But the most exciting aspect of this under-the-radar BDC might be that 100% of your investment debt is variable rate. With the nation’s central bank raising interest rates by 225 basis points so far in 2022, and still unfinished, PennantPark is in a great position to raise additional interest income without lifting a finger. This would suggest that your monthly payment is on a solid footing.
Horizon Technology Finance Corp.: 8.67% yield
The third and final ultra-high yield dividend stock with the ability to help you generate $300 in monthly income it is Horizon Technology Finance Corp. (HRZN -1.55%). Horizon has averaged a return of 10% or higher for most of the last decade.
What makes Horizon a bit of an outlier as a BDC and an ultra-high-performing company is its focus on high-growth, early-stage companies. As the name of the company clearly indicates, it is a BDC focused on buying debt for venture capital-backed companies in the technology space. However, it also has debt in companies engaged in life sciences, health information and renewable energy.
You’re probably thinking that investing in seed-stage companies will lead to considerably higher default risks. However, a quick look at the company’s most recent operating results shows the opposite. Of its $550 million-plus debt investment portfolio, only 4.3% of outstanding debt has a credit rating of 1 or 2 on the company’s 1-4 scale. Horizon notes that a 2-rated loan offers a potential for future principal loss, while a credit rating of 1 implies “deteriorating credit quality and a high degree of risk of loss of principal”. Even with rapidly rising interest rates, approximately 96% of the company’s portfolio demonstrates high credit quality or a standard level of risk.
Like PennantPark, Horizon’s focus on small businesses works to its advantage in the performance department. Since it’s making loans to early-stage companies, and many early-stage companies have limited access to credit markets, Horizon can earn an inflation-crushing net return on the debt it owns. At the end of June, Horizon’s return on its debt investment portfolio, which totals 50 investments, stood at a hearty 14.2%.
Another intriguing thing about Horizon Technology Finance that you’re unlikely to find with other ultra-high yield monthly payers is that has an existing share buyback program instead. Since installing this repurchase program, he has repurchased $1.9 million of his common stock and is authorized to repurchase up to $5 million. Reducing the company’s outstanding share count has the potential to boost earnings per share and make the company appear more attractive to investors.