Want $100 in consistent monthly dividend income? Invest $9,555 in these 2 phenomenal ultra-high yielding dividend stocks.

On Wall Street, there is no single investment strategy. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, investors have a myriad of ways to grow their wealth.

However, some strategies perform better than others in making investors rich. One approach that has historically worked wonders is buying and holding high-quality dividend stocks.

Last year, Hartford Funds released a wide-ranging report that examined the many ways and scenarios in which dividend stocks have outperformed non-paying ones over long periods. In particular, one table compared the average annual return of income stocks versus defaults over the last 50 years (1973-2023), while also taking into account the average volatility of each group.

According to the report, “Dividend Power: Past, Present and Future,” dividend stocks were 6% less volatile than broad-based stocks. S&P 500 over the past half century and generated an average annual return of 9.17%. Meanwhile, defaults were 18% more volatile than the benchmark and produced a modest 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 repeatedly profitable. But that doesn’t mean all dividend stocks are the same.

According to 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. Since yield is 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 supercharged unmissable yield. Dividends are no guarantee, and there’s always the possibility that a company’s struggles may require a cut.

Fortunately, not all ultra-high-yielding income stocks are problems. By “ultra-high yield,” I mean public companies whose returns are at least four times the S&P 500’s return.

In fact, some of the highest-octane income stocks to buy distribute their dividends on a monthly base!

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, in the following two ultra-high-yielding dividend stocks that currently have a average 12.56% return as I write this!

AGNC investment: return 13.97%.

The first phenomenal monthly income payer that can regularly fatten your wallet from an initial investment of $9,555 split two ways is the mortgage real estate investment trust (REIT) AGNC Investments (AGNC -0.48%). While AGNC’s nearly 14% return might seem unsustainable, it has delivered double-digit returns in 13 of the past 14 years.

AGNC dividend yield data by YCharts.

Mortgage REITs are companies that seek to borrow money at low short-term borrowing rates and use that capital to buy longer-term, higher-yielding assets such as mortgage-backed securities (MBS). That’s 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 speed with which these changes occur. When the Federal Reserve embarked on its most aggressive rate hike cycle in four decades, starting in March 2022, it significantly increased the cost of short-term borrowing. This greatly impacted the net interest margin and book value of AGNC and the mortgage REIT industry. The share price of mortgage REITs is often close to their book value.

But after two years of pain, a perfect scenario is brewing for AGNC Investment.

First, the nation’s central bank is expected to begin a rate easing cycle in September. Historically, mortgage REITs perform best when interest rates are falling. AGNC should be able to purchase higher-yielding MBS to increase the average yield on the assets it holds, but will also see short-term borrowing costs begin to decline, leading to an expansion in net margin of interest over time.

To build on this point, the Fed appears to be slowing its actions after holding back from raising rates in 2022. As mentioned earlier, the speed of monetary policy moves is as important as the moves themselves. A telegraphic, slow-stepping process allows AGNC and its peers to fine-tune their investment portfolios to maximize returns.

We can also see the longest yield curve inversion on record to taper off and eventually normalize. Historically, the Treasury yield curve has spent a disproportionate amount of time sloping up and to the right. This means that Treasuries with maturities in 10 or 30 years have had higher yields than Treasuries maturing in one year or less. When the yield curve is no longer inverted, it may provide another boost to AGNC’s net interest income and book value.

The last piece of the puzzle is that AGNC invests almost exclusively in agency MBS. As of June 30, just $1 billion of its $66 billion investment portfolio was put to work in riskier assets. The beauty of “agency” assets is that they are backed by the federal government in the unlikely event of default on the underlying MBS. This additional protection gives AGNC the confidence to grow its portfolio and increase its profit potential.

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PennantPark Variable Rate Equity: 11.15% yield.

The second sensational dividend stock with ultra-high yield that can help earn $100 monthly income from an initial investment of $9,555 split two ways is the small-cap business development company (BDC). PennantPark Floating Rate Capital (PFLT 0.64%). PennantPark raised its dividend modestly on two separate occasions last year and currently yields north of 11%!

The purpose of BDCs is to generate income by investing in the equity (preferred or common stock) and/or debt of middle market companies — that is, small and micro-cap businesses that are largely unproven. Through June, PennantPark oversaw an investment portfolio of about $1.66 billion, of which $1.45 billion was related to debt securities. In short, it is a debt-focused BDC.

While rising interest rates hurt AGNC Investment, they helped PennantPark Floating Rate Capital. As of September 30, 2021, the company’s weighted average return on debt investments increased from 7.4% to 12.1%.

One of the reasons PennantPark is able to generate such robust returns is that it deals with unproven businesses that have limited access to traditional financial services. Therefore, the loan yields that PennantPark monitors tend to be good above the market average.

The other reason this yield is so staggeringly high is that PennantPark’s entire $1.45 billion debt portfolio is variable rate. The Fed raised its target federal funds rate by 525 basis points from March 2022, putting more revenue in PennantPark’s pockets. Even though the Fed is expected to start cutting rates in September, PennantPark should be able to take advantage of this slow decline.

Perhaps the most interesting thing about PennantPark is that despite dealing with unproven businesses, 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 in which PennantPark protects its principal.

For example, all but $1.2 million of its $1.45 billion debt securities portfolio was put into senior secured debt. If one of the company’s borrowers should seek bankruptcy protection, first-lien secured debt holders are first in line for repayment. While this has not been a common occurrence for PennantPark, it is well positioned should such an issue arise.

The company’s portfolio is also very diversified, with $1.66 billion across 151 companies. With an average investment size of just $11 million, it ensures that no one company is critical to its success.