One of the great aspects about putting your money to work on Wall Street is there's no one-size-fits-all strategy to build wealth. Whether you're a growth-oriented or value-focused investor, prefer megacap or small-cap stocks, or buy individual stocks or basket funds (e.g., exchange-traded funds), there's a path for you to grow your nest egg.
But among these many wealth-building strategies, buying dividend stocks is consistently among the smartest and most fruitful.
Publicly traded companies that pay a regular dividend are typically profitable on a recurring basis and time-tested. In other words, these are businesses that have shown investors they can confidently navigate economic downturns and come out stronger on the other end.
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But what really stands out about dividend stocks is their long-term outperformance. While income stocks might take a back seat to growth stocks during big market rallies, studies have shown that dividend stocks leave non-payers in the dust over extended periods.
In 2013, J.P. Morgan Asset Management, the asset management division of money-center bank JPMorgan Chase, released a report that compared the annualized 40-year returns (1972 to 2012) of companies initiating and growing their payouts to public companies not paying a dividend. The end result was a 9.5% annualized return for the dividend payers and a paltry 1.6% annualized return for those not doling out a dividend.
While the stock market is packed with dividend stocks, many of which are brand-name or familiar businesses, some of the best and safest dividends on the planet come from completely under-the-radar companies. What follows are two absolutely unknown stocks that produce some of the safest dividend income on the planet.
York Water: 1.9% yield
The first off-the-radar stock that produces exceptionally safe dividend income is water utility York Water (YORW -1.14%). With a market cap of $610 million and average daily volume of less than 43,000 shares, it's truly a company most investors have probably never heard about.
To address the elephant in the room, York's 1.9% yield isn't much higher than the 1.47% yield of the benchmark S&P 500. But there's a good reason for this seemingly pedestrian yield. Since yield is a function of payout relative to share price, a company whose share price continually moves higher will adversely impact its dividend yield. Since the start of the century, York's total return, including dividends paid, has crushed the total return of the S&P 500 -- 1,330% for York Water vs. 382% for the S&P 500.
What helps York Water stand out is the consistency of its payout. Although it hasn't always paid a quarterly dividend, the company hasn't missed a scheduled payment since James Madison was president of the United States in 1816. Put another way, York has been paying a consecutive dividend for 206 years, which is about six decades longer than the next-closest publicly traded company in the U.S.
York is a water and wastewater utility provider to 54 municipalities in South-Central Pennsylvania. Though it does grow from the occasional acquisition, the steadiness of its payout is a function of being a regulated utility. By "regulated," I mean York requires approval from the Pennsylvania Public Utility Commission (PPUC) before it can increase rates on its customers.
Having to seek approval from the PPUC to hike rates might sound like a nuisance, but it's actually a blessing in disguise. Having its rates transparently set means not having to deal with wholesale pricing.
Even more important, York Water was recently given the green light from the PPUC to raise rates on approximately 75,000 customers in order to recover roughly $176 million worth of current and future infrastructure investments. This rate hike is expected to increase York's annual revenue by $13.5 million, or about 22%. The additional cash flow generated from this rate hike should allow the company to continue modestly growing its payout over time.
Lastly, don't overlook the simple fact that York provides a basic necessity. Most water utilities operate as monopolies or duopolies, leaving consumers with little choice as to which company provides their water and wastewater services. Companies providing basic necessity goods and services often see little fluctuation in consumer demand or operating cash flow from one year to the next.
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PennantPark Floating Rate Capital: 11.3% yield
The second unknown stock that's fully capable of producing some of the safest dividend income on the planet is business development company (BDC) PennantPark Floating Rate Capital (PFLT 0.28%). Though PennantPark's average daily volume (723,900 shares) is considerably higher than York Water, it's still well off the radar of the average investor.
However, what shouldn't be off the radar is the company's 11.3% yield. PennantPark has been doling out a monthly (yes, monthly!) dividend to its shareholders for the past 12 years. Note, this monthly payout has been modestly increased twice over the past five months.
BDCs invest in either the debt or equity (common/preferred stock) of middle-market businesses -- i.e., typically small-cap or microcap companies. Though PennantPark closed out March holding $157.2 million in combined preferred and common stock, the $1.01 billion in first-lien secured debt in its portfolio makes it much more a debt-focused BDC.
Having a debt-focused portfolio in middle-market companies comes with an assortment of advantages for PennantPark and its shareholders. For one, most small businesses are unproven, and therefore have limited access to debt and credit markets. With few options, PennantPark is able to secure above-average rates on the debt investments it holds.
But the biggest advantage for the company just might be the composition of its debt investments. All $1.01 billion in debt securities sport variable rates. Every single rate hike the Federal Reserve enacts is putting more money in PennantPark's pockets. Between September 2021 and March 2023, the company's weighted-average yield on debt investments surged from 7.4% to 11.8%.
To build on the above, the nation's central bank doesn't appear to be done hiking rates. Despite increasing the federal funds rate by 500 basis points since March 2022, Fed Chair Jay Powell has intimated that two additional quarter-point (25 basis-point) hikes may be on the table.
On top of being positioned perfectly for the current economic environment, PennantPark Floating Rate Capital has made the right moves to protect its invested capital. It's almost entirely invested in first-lien secured debt, which is first in line for repayment in the event that one of its debtors seeks bankruptcy protection.
Furthermore, it's entire $1.164 billion investment portfolio is spread across 130 companies, equating to an average investment size of $9 million. This diversification ensures that no single investment can upend PennantPark or its lofty dividend.
