It has been a difficult year for ordinary and professional investors. Since the start of the year, both the offshore S&P500 and dependent on technology Nasdaq Compound fell into bearish territory. To add to these challenges, the US economy has contracted in consecutive quarters and a number of leading companies in the sector have downgraded their growth prospects, at least in the short term.
But there is a silver lining to this hustle and bustle. No matter how volatile stocks are in the short term, every crash, correction and bear market in history (except the current bear market) has been erased by a bull rally. In other words, steep declines are a red carpet opportunity for patient investors to pounce.
Arguably, the best offers of the moment are found among dividend-paying stocks. Companies that regularly pay a dividend are almost always profitable on a recurring basis and have a proven track record – that is, they have demonstrated their ability to weather economic contractions and recessions.
Additionally, income stocks have a long history of circling around their non-paying peers. A JP Morgan Asset Management report published in 2013 found that companies that initiated and increased their payouts over a 40-year period (1972-2012) had an average annual return of 9.5%. As for the non-paying stocks, they only obtained an annualized return of 1.6% over the same period.
But not all dividend stocks are created equal. Some have the potential to provide a secure, inflation-crushing monthly income. The following three ultra-high yielding dividend stocks are on average… average… an annual return of 9.73% and distribute payments to their shareholders each month. If you want to collect $300 in monthly income, you would only need to invest $37,000, split equally, among these three supercharged monthly payers.
AGNC Investment Corp. : yield of 11.27%
The first ultra-high yielding dividend stock offering a monster monthly payout is the Mortgage Real Estate Investment Trust (REIT) AGNC Investment Corp. (AGNC -0.31%). AGNC’s nearly 11.3% return is, indeed, the highest on this list, and the company has averaged double-digit returns in 12 of the past 13 years.
Although the products that mortgage REITs purchase can be somewhat complex, the operating model of this industry is very easy to understand. Mortgage REITs like AGNC seek to borrow money at the lowest possible short-term rate and acquire higher-yielding long-term assets. These long-term assets tend to be mortgage-backed securities (MBS), hence the name of the industry. The greater the spread (known as the “net interest margin”) between the average return received from the assets held minus the average borrowing rate, the more profitable the mortgage REIT is often.
As I’ve pointed out before, what makes AGNC a favorite among income seekers is the predictability of the mortgage REIT industry. Keeping a close eye on the Federal Reserve’s monetary policy and the yield curve will tell investors just about everything they need to know about the sector’s performance.
To be perfectly frank, AGNC has faced a mountain of headwinds since the start of the year. Portions of the yield curve have inverted and the Fed is aggressively raising interest rates to rein in historically high inflation. Both of these factors weighed on AGNC’s book value (mortgage REITs often trade near book value) and net interest margin.
But there is good news: Mortgage REITs are among the best candidates for buying bad stock market news. For example, while higher interest rates increase short-term borrowing costs for AGNC, they will also increase the returns generated by purchased MBS over time. To add to this point, the US economy spends much longer expanding than contracting, which promotes a yield curve that most often slopes up and to the right. In short, the numbers game suggests that patient investors will prevail.
Finally, 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 additional protection provides AGNC with the ability to deploy leverage to increase profits.
PennantPark Floating Rate Principal: 9.25% yield
The second ultra-high-yielding dividend stock that can help you generate $300 in monthly income is a little-known business development company (BDC). PennantPark Floating Rate Capital (LTFP 1.91%). PennantPark’s monthly payout has been set at $0.095 for over seven years, with the company currently producing nearly 9.3%.
PennantPark’s $1.23 billion investment portfolio includes a variety of investments. About 13% of its capital is tied up in preferred shares and common stock. The remaining 87% is almost entirely made up of senior secured debt from middle market companies, with a fractional percentage tied to junior secured debt.
A “midstream company” is generally a publicly traded company with a market capitalization of less than $2 billion. Since most small cap companies are unprofitable and/or unproven, their access to credit/debt facilities may be limited. PennantPark is more than happy to provide senior secured loans to approved businesses because they know they can earn a hefty 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.
Another thing to note is PennantPark’s choice to deal in pretty much only senior secured debt. In the event of default, senior secured creditors are first in line for payment. Please note that I am not saying late payments are a good thing for PennantPark. Rather, I am laying out the case that his debt portfolio has been prudently derisked.
Another feather in the PennantPark Floating Rate Capital cap 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 were unaccounted for (i.e. delinquent). This represented a microscopic 0.9% and 0.1% of the company’s portfolio on a cost and value basis, respectively.
But perhaps the most exciting aspect of this under-the-radar BDC is that 100% of its investment debt is floating rate. With the country’s central bank raising interest rates by 225 basis points so far in 2022, and far from done, PennantPark is in a great position to collect additional interest income without having to raise the small finger. This would suggest that his monthly payment is on solid ground.
Horizon Technology Finance Corp. : yield of 8.67%
The third and final ultra high yielding dividend stock with the ability to help you generate $300 in monthly income is Horizon Technology Finance Corp. (HRZN -1.34%). Horizon has averaged a return of 10% or more for most of the past decade.
What makes Horizon a bit of an outlier as a BDC and a very high-yield company is its focus on high-growth, early-stage companies. As the name of the company clearly suggests, it is a BDC focused on buying debt for venture capital-backed companies in the technology space. However, he also holds debt in companies active in life sciences, healthcare information and renewable energy.
You probably think that investing in early-stage companies will lead to significantly higher default risks. However, a quick look at the company’s most recent operating results shows otherwise. Of its more than $550 million 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 the potential for future capital loss. , while a credit rating of 1 implies “a deterioration in credit quality and a high degree of risk of loss of principal”. Even with rapidly rising interest rates, around 96% of the company’s portfolio is of high credit quality or standard risk.
Similar to PennantPark, Horizon’s focus on small businesses works to its advantage in the yield department. Because it lends to early-stage companies and many early-stage companies have less access to credit markets, Horizon is able to earn inflation-crushing returns on the debt it holds. . At the end of June, Horizon’s yield on its bond investment portfolio, which totals 50 investments, was 14.2%.
Another intriguing thing about Horizon Technology Finance that you probably won’t find with other ultra high yield monthly payers is that it has an existing stock buyback program in place. Since the installation of this repurchase program, it has repurchased for 1.9 million dollars of its ordinary shares and has the authorization to repurchase up to 5 million dollars. Reducing the number of the company’s outstanding shares has the potential to increase earnings per share and make the company more fundamentally attractive to investors.