One of the best aspects of putting your money to work on Wall Street is there’s no one-size-fits-all blueprint for success. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, there’s likely to be one or more stocks that can help you meet your investment goals.
But among the countless strategies investors can employ to build their wealth on Wall Street, few have been more successful than buying and holding high-quality dividend stocks.
In The Power of Dividends: Past, Present, and Future, the analysts at Hartford Funds, in collaboration with Ned Davis Research, compared the performance of dividend stocks to non-payers over a 50-year stretch (1973-2023). What they found was a night-and-day outperformance by the income stocks.
According Hartford Funds, dividend stocks averaged an annual return of 9.17% over a half-century and were 6% less volatile than the benchmark S&P 500. Meanwhile, the non-payers generated a modest 4.27% average annual return and were 18% more volatile than the S&P 500. Since income stocks tend to be recurringly profitable and time-tested, this outperformance isn’t a surprise.
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The concern for income investors is that yield and risk tend to correlate. While ultra-high-yielding stocks -- those with yields four or more times higher than the yield of the S&P 500 -- are enticing, there’s a heightened possibility of poor returns. Since yield is a function of payout relative to share price, a company with a struggling or failing operating model can lure investors in with a high but unsustainable yield.
The silver lining for income seekers is that not all supercharged dividend stocks are bad news. In fact, some of the most-promising high-yielding stocks are doling out their payments on a monthly basis.
If you want $200 in super-safe monthly dividend income in 2025, simply invest $22,050 (split equally, three ways) into the following three ultra-high-yield stocks, which sport an average yield of 10.9%!
Realty Income: 6.03% yield
Arguably the safest ultra-high-yielding monthly dividend stock on the planet is premier retail real estate investment trust (REIT) Realty Income (O). Realty Income is yielding 6% and has increased its payout for 109 consecutive quarters (more than 27 straight years).
What makes Realty Income so special is the company’s top-notch commercial real estate (CRE) portfolio. As of the end of September, it contained close to 15,500 CRE properties, roughly 90% of which are resilient to economic downturns.
The not-so-subtle secret to success for Realty Income is that it primarily leases to well-known, stand-alone businesses that draw customer traffic in any economic climate. Some of its core lease categories include grocery stores, convenience stores, and dollar stores, which are destinations for consumers regardless of how well or poorly the U.S. economy is performing. Being well-diversified by client and geography ensures that its funds from operations (FFO) remains highly predictable from one year to the next.
Realty Income’s management team is also expanding the company beyond its retail roots. It’s completed two leasing deals in the gaming industry, formed a joint venture will Digital Realty Trust to lease build-to-suit data centers, and has been known to make acquisitions every now and then to expand its CRE portfolio and enter new verticals.
Furthermore, Realty Income’s meticulous vetting process when leasing has resulted in bad debt accounting for just 0.37% of total revenue between 2014 and 2023. With a weighted average lease length of 9.4 years, the company’s FFO is incredibly safe.
Lastly, Realty Income stock is valued at less than 12 times consensus cash flow for 2025, which represents a 29% discount to its average multiple to cash flow over the last five years.
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PennantPark Floating Rate Capital: 11.16% yield
A second sensational stock that can help produce $200 in monthly dividend income from a starting investment of $22,050 (split three ways) in 2025 is little-known business development company (BDC) PennantPark Floating Rate Capital (PFLT -0.09%). PennantPark’s yield has pretty consistently hovered between 8% and 12% over the last decade.
BDCs are companies that invest in the equity (common and preferred stock) and/or debt of largely unproven businesses (i.e., “middle-market companies”). With approximately $1.75 billion of its $1.98 billion portfolio held in debt securities, as of Sept. 30, PennantPark falls into the camp of being a debt-driven BDC.
The biggest advantage of focusing on debt securities is the yield it generates. Middle-market companies often have limited access to basic financial services, including loans and lines of credit. This means PennantPark is able to net a higher yield on the loans it oversees, as evidenced by its weighted average yield on debt investments of 11.5%!
Another undeniable advantage is that 100% of PennantPark’s loan portfolio sports variable rates. When the nation’s central bank undertook the steepest rate-hiking cycle in four decades between March 2022 and July 2023, it increased PennantPark’s weighted average yield on debt investments from 7.4% (as of Sept. 30, 2021) to as high as 12.6%. Even with the Federal Reserve now in a rate-easing cycle, PennantPark should have plenty of opportunity to lock in loans with superior yields.
The company’s management team has also done a particularly good job of protecting its principal. All but $2.7 million of its $1.75 billion debt portfolio is first-lien secured notes. In the event that a borrower seeks bankruptcy protection, first-lien secured debtholders are at the front of the line for repayment.
The icing on the cake is that PennantPark Floating Rate Capital’s shares are trading at a 3% discount to its book value, as of the end of September, which makes its stock especially attractive for income seekers.
AGNC Investment: 15.5% yield
The third ultra-high-yielding stock that can deliver $200 in super-safe monthly dividend income from a beginning investment of $22,050 (split equally) in 2025 is none other mortgage REIT AGNC Investment (AGNC -0.32%). Although AGNC’s 15.5% yield may appear too good to be true, its yield has spent much of the last decade hovering between 10% and 15%.
Mortgage REITs are interest-sensitive companies that aim to borrow money at lower short-term lending rates and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The goal for mortgage REITs is to maximize their net interest margin, which is the average yield they’re generating on owned assets less their average borrowing costs.
Whereas PennantPark Floating Rate Capital saw its weighted average yield on debt investment soar as interest rates rose, the Fed’s hawkish monetary policy increased short-term borrowing costs and reduced AGNC’s net interest margin.
However, the shift to a rate-easing cycle should breathe new life into AGNC’s operating model. AGNC should still be able to purchase higher-yielding MBSs that increase the average yield on its own assets, all while short-term borrowing costs decline. This is a recipe for net interest margin expansion, and it helps explain why mortgage REITs perform their best, historically, during rate-easing cycles.
Additionally, AGNC almost exclusively invests in agency assets -- just $1 billion of AGNC Investment’s $73.1 billion portfolio isn’t in agency securities. An “agency” security is backed by the federal government in the event of default. This extra protection is what allows AGNC to lever its investments and sustain its outsized dividend.
Finally, AGNC Investment is valued at a 2% discount to its book value, as of the September-ended quarter. With the outlook for the mortgage REIT industry positively shifting amid a rate-easing cycle, now looks like an opportune time to buy.
