It has been a challenging year for both everyday and professional investors. Since the beginning of the year, both broad-based S&P 500 and dependent on technology Nasdaq Composite have fallen into bear market territory. To add to these challenges, the US economy has contracted in consecutive quarters and a number of leading companies in the industry have lowered their growth prospects, at least in the near term.

But this turmoil has a strong line. No matter how volatile stocks may appear in the short term, every crash, correction, and single market in history (with the exception of the ongoing bear market) has been wiped out by a bull market rally. In other words, big declines are a red carpet opportunity for patient investors to jump on.

Three hundred dollar bills rolled up neatly lined up on a counter.

Image source: Getty Images.

Perhaps the best deals right now can be found among dividend stocks. Companies that regularly pay a dividend are almost always profitable on a repeated, time-tested basis — that is, they have demonstrated their ability to navigate economic contractions and recessions.

Additionally, income stocks have an extensive history of running circles around their non-paying peers. A JP Morgan Asset Management report published in 2013 found that companies that started and increased their payouts over a 40-year period (1972-2012) had an average annual return of 9.5%. As for non-paying stocks, they only achieved an annualized return of 1.6% over the same time period.

But not all dividend stocks are created equal. Some have the potential to provide secure, inflation-busting income on a monthly basis. The following three high-yielding dividend stocks average… average… an annual yield of 9.73% and they pay out payments to their shareholders every month. If you want to accumulate $300 in monthly income, you’ll only need to invest $37,000, divided equally between these three loaded monthly payers.

AGNC Investment Corp.: 11.27% yield

The first high-yielding dividend stock that offers a monster monthly payout is the mortgage-backed real estate investment trust (REIT). AGNC Investment Corp. (AGNC -0.31%). AGNC’s nearly 11.3% yield is, indeed, the highest on this list, and the company has averaged double-digit returns in 12 of the past 13 years.

Although the mortgage products that REITs buy can be somewhat complex, the operating model for this industry is very easy to understand. Mortgage REITs like AGNC seek to borrow at the lowest possible short-term rate and buy long-term, higher-yielding assets. These long-term assets tend to be mortgage-backed securities (MBS), hence the industry’s name. The larger the gap (known as the “net interest margin”) between the average yield earned on the assets owned minus the average borrowing rate, often the more profitable the mortgage REIT is.

As I’ve noted before, what makes AGNC such a favorite among income seekers is the predictability of the mortgage REIT industry. A close look at the Federal Reserve’s monetary policy and the interest rate yield curve will tell investors everything they need to know about how well or poorly the industry is performing.

To be perfectly blunt, AGNC has faced a mountain of headwinds since the beginning of the year. Part of the yield curve has inverted and the Fed is aggressively raising interest rates to tame historically high inflation. Both factors have weighed on AGNC’s book value (mortgage REITs often trade close to their book value) and net interest margin.

But there is good news: Mortgage REITs are among the stock market’s prime candidates for buying bad news. For example, while higher interest rates are increasing short-term borrowing costs for AGNC, they will also increase the yields generated by the MBS purchased over time. To add to this point, the US economy spends far more time expanding than contracting, which favors a yield curve that slopes up and to the right more often than not. In short, the numbers game suggests that patient investors will prevail.

As a final point, 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 its earnings.

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PennantPark Floating Rate Equity: 9.25% yield.

The second high-yielding dividend stock that can help you generate $300 in monthly income is the little-known business development company (BDC). PennantPark Floating Rate Equity (PFLT 1.91%). PennantPark’s monthly payout has been fixed at $0.095 for more than seven years, with the company currently yielding close to 9.3%.

PennantPark’s $1.23 billion investment portfolio consists of a variety of investments. About 13% of its capital is tied up in preferred shares and common equity. The remaining 87% consists almost entirely of first-lien secured debt from middle market companies, with a fractional percentage related to second-lien secured debt.

A “middle market company” is typically a publicly traded business with a market capitalization under $2 billion. Since most small-cap companies are not profitable and/or time-tested, their access to credit/debt facilities may be limited. PennantPark is more than happy to provide first lien secured loans to vetted companies because it knows it can generate a good yield on that debt. As of the end of June, the company’s $1.06 billion debt investment portfolio was generating a whopping 8.5% yield.

Something else to note is PennantPark’s choice to deal almost exclusively in first lien secured debt. In the event of default, first-lien secured debtors are first in line for payment. Mind you, I’m not saying payment delinquencies are a good thing for PennantPark. Rather, I am making the case that her debt portfolio has been carefully weeded out.

Another feather in PennantPark Floating Rate Capital’s 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 non-accrual (ie in arrears). This represented a microscopic 0.9% and 0.1% of the company’s portfolio on a cost and value basis, respectively.

But the most exciting aspect of this under-the-radar BDC might just be that 100% of its investment debt is of the variable-rate variety. With the country’s Central Bank raising interest rates by 225 basis points so far in 2022, and nowhere near the end, PennantPark is in a great position to collect additional interest income without having to lift a finger. This would suggest that her monthly payment is on a consistent basis.

Horizon Technology Finance Corp.: yield 8.67%.

The third and final 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 yield of 10% or higher for most of the ensuing decade.

What makes Horizon a bit more unusual as a BDC and ultra-high yield company is its focus on high-growth and development-stage companies. As the company’s name clearly states, this is a BDC focused on buying debt for venture capital-backed companies in the technology space. However, it also holds debt in companies engaged in life sciences, healthcare information and renewable energy.

You are probably thinking 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 suggests otherwise. Of its debt investment portfolio of more than $550 million, only 4.3% of outstanding debt has a credit rating of 1 or 2 on the company’s scale of 1 to 4. Horizon notes that a 2-rated credit provides a potential for future principal loss, while a credit rating of 1 means “deteriorating credit quality and high risk of principal loss.” Even with rapidly rising interest rates, approximately 96% of the company’s portfolio is demonstrating high credit quality or a standard level of risk.

Similar to PennantPark, Horizon’s focus on small businesses works to its advantage in the yield department. Because it lends to growth-stage companies and many early-stage companies have reduced access to credit markets, Horizon is able to earn an inflation-beating yield on the debt it holds. At the end of June, Horizon’s yield on its debt investment portfolio, which amounts to 50 investments, was 14.2%.

Something else intriguing about Horizon Technology Finance that you’re unlikely to find with other high-yield monthly payers is that it has an existing share buyback program. Since instituting this repurchase program, it has repurchased $1.9 million of its common stock and is authorized to repurchase up to $5 million. Reducing a company’s number of outstanding shares has the potential to increase earnings per share and make the company look fundamentally more attractive to investors.

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