One of the best aspects of putting your money to work on Wall Street is that there’s no one-size-fits-all strategy to wealth creation. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, there’s an investment strategy that fits all investment tastes and tolerances.
But when examined with an even broader lens, few investment strategies have been more consistently profitable than buying dividend stocks and holding them over an extended period.
Last year, Hartford Funds released an extensive report (“The Power of Dividends: Past, Present, and Future”) that examined the outperformance of income stocks over the long run. In a collaboration with Ned Davis Research, Hartford Funds noted that companies paying dividends delivered an average annual return of 9.18% over a 50-year period (1973-2022). Meanwhile, the non-payers generated a far more modest annual average return of 3.95% over a half century.
Something else to note is that dividend payers more than doubled-up the annualized gains of non-payers while being far less volatile. Whereas dividend payers were 6% less volatile than the benchmark S&P 500, the non-payers were 18% more volatile.
The biggest challenge income investors face is simply deciding which dividend stocks to buy. While income seekers would, ideally, like to receive the highest yield possible with minimal risk to their principal, risk and yield tend to go hand-in-hand. In other words, ultra-high-yield dividend stocks — those with yields four or more times higher than the S&P 500 — can sometimes be more trouble than they’re worth.
However, this isn’t always the case. If you’re looking to generate $300 in super safe monthly dividend income (note the emphasis on “monthly” income), simply invest $43,000, split equally, into the following two ultra-high-yield stocks, which sport an average yield of 8.39%!
Realty Income: 5.86% yield
The first supercharged income stock that can help you bring home $300 in rock-solid monthly dividend income from a starting investment of $43,000 split equally is the cream of the crop among retail real estate investment trusts (REITs), Realty Income (NYSE: O). Realty Income has increased its payout 124 times since going public in 1994, including for 106 consecutive quarters.
There are two reasons retail REITs have been beaten up a bit as an industry over the last two years. First, higher Treasury yields have provided investors with an outlet to net higher income without the risk to their principal that comes with buying equities.
The other concern for retail REITs like Realty Income has been the health of the U.S. economy. A couple of money-based metrics and predictive recessionary indicators suggest a downturn in the economy may be coming. That’s a bit concerning for an industry that leases properties to retailers.
The good news is that Realty Income is well-positioned to thrive in virtually any economic climate. It closed out January 2024 with a portfolio that consisted of 15,450 commercial real estate (CRE) properties. Approximately 89% of the total rent associated with its CRE portfolio is “resilient to economic downturns and/or isolated from e-commerce pressures.”
The company’s not-so-subtle secret to success is that 40% of its annualized contractual rent comes from the combination of grocery stores, convenience stores, dollar stores, home improvement stores, and drug stores. These are businesses consumers are going to visit regardless of how well or poorly the U.S. economy and stock market are performing. For Realty Income, it means highly predictable funds from operation regardless of what’s happening with the U.S. economy.
What should really excite investors are Realty Income’s efforts to diversify its CRE portfolio beyond traditional retail assets. For instance, it’s closed two deals in the gaming industry over the last two years. Realty Income completed the acquisition of Spirit Realty Capital in January for $9.3 billion, as well. While Spirit Realty’s portfolio was complementary to its own, the combination may open new lease channels.
Consistency is also king with Realty Income. Since the start of the century, it’s delivered a median occupancy rate of 98.2%! That compares to the average S&P 500 REIT, which has produced a median occupancy rate of 94.2% over the last 23 years.
Opportunistic income seekers can buy this top-tier retail REIT right now for 11.5 times forward-year cash flow, which represents a 35% discount to its average cash flow multiple over the trailing-five-year period.
PennantPark Floating Rate Capital: 10.91% yield
The second ultra-high-yield stock that can help you generate $300 in super safe monthly dividend income from a beginning investment of $43,000 split two ways is completely under-the-radar business development company (BDC) PennantPark Floating Rate Capital (NYSE: PFLT). PennantPark increased its monthly payout twice in 2023 and is yielding close to 11%.
A BDC is a business that invests its capital into the equity (common and/or preferred stock) or debt of middle-market companies — i.e., generally unproven micro- and small-cap businesses. As of the end of 2023, PennantPark held a little over $180 million in equity securities and $1.09 billion in secured debt. This makes it primarily a debt-focused BDC.
There are a number of reasons being a debt-focused BDC has been exceptionally profitable in the current economic climate, and yield tops the list.
Most of the businesses PennantPark is lending to are unproven and have limited access to traditional debt and credit markets. With few avenues for capital available, PennantPark is able to generate an above-market yield on the loans it holds. In the December-ended quarter, it raked in a weighted average yield on debt investments of 12.5%!
But the bread-and-butter of PennantPark’s $1.09 billion debt-securities portfolio is that it’s entirely variable rate. Since March 2022, the Federal Reserve has increased its federal funds rate by 525 basis points and marked the quickest rate-hiking cycle in about four decades. Since Sept. 30, 2021, PennantPark’s weighted average yield on debt investments has expanded by 510 basis points. The longer the nation’s central bank sustains higher interest rates, the more money PennantPark Floating Rate Capital is set to make.
Something else impressive about this off-the-radar BDC has been its capital preservation tactics. Including its equity holdings, it has approximately $1.271 billion invested across 141 companies. This works out to $9 million per investment, which ensures that no single investment is critical to the company’s success. As of Dec. 31, 2023, only one investment was on non-accrual (i.e., delinquent), representing just 0.1% of its total portfolio on a cost basis.
Furthermore, 99.98% of the company’s $1.09 billion debt-securities portfolio is first-lien secured loans. First-lien secured debtholders are first in line for repayment in the event that a borrower seeks bankruptcy protection.
With PennantPark valued right around its book value of $11.20 per share, now looks like the perfect time for monthly income seekers to pounce.
Should you invest $1,000 in Realty Income right now?
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Sean Williams has positions in PennantPark Floating Rate Capital. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Want $300 in Super Safe Monthly Dividend Income? Invest $43,000 Into the Following 2 Ultra-High-Yield Stocks. was originally published by The Motley Fool