On Wall Street, there is no one-size-fits-all investment strategy. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, investors have a plethora of ways they can grow their wealth.
Nevertheless, some strategies have better track records than others at making investors richer. One approach that's historically worked wonders is buying and holding high-quality dividend stocks .
Last year, Hartford Funds released an extensive report that examined the many ways and scenarios dividend stocks have outperformed non-payers over long stretches. In particular, one table compared the average annual return of income stocks to non-payers over the last 50 years (1973-2023), while also taking into account the average volatility of each group.
According to the report, "The Power of Dividends: Past, Present, and Future," dividend stocks were 6% less volatile than the broad-based S&P 500 over the last half-century, and generated an average annual return of 9.17% . Meanwhile, non-payers were 18% more volatile than the benchmark index and produced a subdued annualized return of just 4.27% over 50 years.
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Companies that regularly share a percentage of their profits with investors are usually time-tested and recurringly profitable. But this doesn't mean all dividend stocks are alike.
Based on a separate study from Mellon Capital that was released in the mid-2010s, high-yielding dividend stocks are sometimes more trouble than they're worth . With yield being a function of share price, a company with a struggling or failing operating model and a declining share price can "trap" investors into what looks like a can't-miss, supercharged yield. Dividends aren't a guarantee and there's always the possibility that a company's struggles could necessitate a reduction.
Thankfully, not all ultra-high-yield income stocks are trouble. By "ultra-high-yield," I'm referring to public companies whose yields are, at minimum, four times greater than that of the S&P 500's yield.
In fact, some of the top high-octane income stocks to buy dole out their dividends on a monthly basis!
If you want to add $100 in dividend income to your pocket every month, all you have to do is invest $9,555, split equally, across the following two ultra-high-yield dividend stocks, which are currently sporting an average yield of 12.56% as I write this!
AGNC Investment: 13.97% yield
The first phenomenal monthly income payer that can fatten your wallet with regularity from an initial investment of $9,555 split two ways is mortgage real estate investment trust (REIT) AGNC Investment (NASDAQ: AGNC) . Though AGNC's yield of nearly 14% might sound unsustainable, it's delivered a double-digit yield in 13 of the last 14 years.
AGNC Dividend Yield data by YCharts .
Mortgage REITs are businesses that seek to borrow money at low short-term lending rates and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). This is how the industry got its name: "mortgage REITs."
Based on this business model, AGNC and its peers are highly sensitive not only to changes in interest rates, but also to the velocity at which these changes occur. When the Federal Reserve undertook its most aggressive rate-hiking cycle in four decades, beginning in March 2022, it sent short-term borrowing costs up significantly. This weighed heavily on the net interest margin and book value of AGNC and the mortgage REIT industry. The share price of mortgage REITs often hovers close to their book value.
But after two years of pain, a perfect scenario is brewing for AGNC Investment.
First of all, the nation's central bank is widely expected to kick off a rate-easing cycle in September. Historically, mortgage REITs perform their best when interest rates are declining. AGNC should be able to purchase higher-yielding MBSs to increase the average yield on the assets it owns, but will also see its short-term borrowing costs begin to decline, leading to an expansion of net interest margin over time.
To build on this point, the Fed appears to be slow-stepping its actions after tripping over itself to raise rates in 2022. As I alluded earlier, the velocity of monetary policy moves is just as important as the moves themselves. A telegraphed, slow-stepped process allows AGNC and its peers to adjust their investment portfolios to maximize profits.
We're also liable to see the longest yield-curve inversion on record minimize and, eventually, normalize . Historically, the Treasury yield curve has spent a disproportionate amount of time sloped up and to the right. This is to say that Treasury bonds set to mature in 10 or 30 years have sported higher yields than Treasury bills maturing in a year or less. When the yield curve is no longer inverted, it can provide another boost to AGNC's net interest income and book value.
The final piece of the puzzle is that AGNC almost exclusively invests in agency MBSs . As of June 30, only $1 billion of its $66 billion investment portfolio was put to work in riskier assets. The beauty of "agency" assets is that they're backed by the federal government in the unlikely event of default on the underlying MBS. It's this added protection that gives AGNC the confidence to lever its portfolio and bolster its profit potential.
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PennantPark Floating Rate Capital: 11.15% yield
The second sensational ultra-high-yield dividend stock that can help deliver $100 in monthly income from a starting investment of $9,555 split two ways is small-cap businesses development company (BDC) PennantPark Floating Rate Capital (NYSE: PFLT) . PennantPark modestly increased its dividend on two separate occasions last year and is currently yielding north of 11%!
The goal for BDCs is to generate income by investing in the equity (preferred or common stock) and/or debt of middle-market companies -- i.e., small- and micro-cap businesses that are largely unproven. Through June, PennantPark oversaw a roughly $1.66 billion investment portfolio, $1.45 billion of which was tied to debt securities. In short, it's a debt-focused BDC.
Whereas rising interest rates have hurt AGNC Investment, they've helped PennantPark Floating Rate Capital. Since Sept. 30, 2021, the company's weighted average yield on debt investments has risen from 7.4% to 12.1%.
One reason PennantPark is able to generate such robust yields is because it's dealing with unproven businesses that have limited access to traditional financial services. Therefore, the yields on the loans PennantPark oversees tend to be well above the market average.
The other reason this yield is so jaw-droppingly high is because the entirety of PennantPark's $1.45 billion debt portfolio sports variable rates . The Fed increasing its federal funds target rate by 525 basis points since March 2022 put more income in PennantPark's pockets. Even with the Fed expected to begin easing rates in September, PennantPark should still be able to take advantage of this slow-stepped decline.
Perhaps the most interesting thing about PennantPark is that, despite dealing with businesses that are unproven, only 1.5% of its portfolio, on a cost basis, is delinquent. This is a testament to the company's vetting process and speaks volumes about the ways PennantPark protects its principal .
For instance, all but $1.2 million of its $1.45 billion debt-securities portfolio has been put to work in first-lien secured debt. In the event that one of the company's borrowers were to seek bankruptcy protection, first-lien secured debtholders are at the front of the line for repayment. While this hasn't been a common occurrence for PennantPark, it's well positioned if such a problem were to arise.
The company's portfolio is also highly diversified , with its $1.66 billion spread across 151 companies. Having an average investment size of only $11 million ensures that no one company is critical to its success.
Sean Williams has positions in PennantPark Floating Rate Capital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
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