Meet the little-known company that yields 11%, continues to deliver monthly returns for income seekers, and makes patient investors significantly richer
One of the best parts about putting your money to work on Wall Street is that you don’t have to conform to any blueprint. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, there’s a very good chance you’ll find one or more securities that fit your investment goals and risk tolerance.
But among the countless ways investors can build their wealth on Wall Street, few have proven more successful over longer periods of time than buying and holding high-quality dividend stocks.
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Companies that regularly pay dividends to investors are almost always profitable on a recurring basis, proven and able to provide transparent long-term growth prospects. In other words, they tend to be well-established companies that have demonstrated to investors that they can weather challenging periods and thrive during long-winded economic expansions. These are exactly the types of companies that we expect to increase in value over the long term.
But you don’t have to take my word for it. Recently, Hartford Funds investment advisors updated their data based on a report released last year (The power of dividends: past, present and future), which examined the degree of outperformance between dividend stocks and non-paying stocks over the long term.
According to Hartford Funds, in partnership with Ned Davis Research, non-payers earned a modest average annual return of 4.27% from 1973 to 2023, while being 18% more volatile than the benchmark. S&P500. On the other hand, dividend stocks have more than doubled the average annual total return of non-paying companies over the past half century (9.17%), and have also been 6% less volatile than the S&P 500.
While dividend stocks have a phenomenal track record of making patient investors significantly richer, studies have also shown that risk and return often go hand in hand.
For example, a company with a struggling business model and a declining stock price has the potential to lure income seekers into a yield trap. Because returns are a function of the payout relative to the stock price, companies with ultra-high returns (that is, returns four or more times the return of the S&P 500) require additional scrutiny by investors.
But this doesn’t mean that all ultra-high yield dividend stocks are necessarily problematic. With proper evaluation, ultra-high yield gemstones can be found. Some of the safest supercharged dividend stocks may be companies you’ve never heard of.
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While mortgage real estate investment trusts (REITs) are the typical choice for investors looking for high returns, I’d say there’s an even better way to secure huge annual returns and more than double your money every decade. Meet a little-known business development company (BDC) PennantPark Capital with variable interest(NYSE:PFLT)which currently yields 11% and distributes $0.1025 per share at a monthly basic!
A BDC is a company that invests in the equity (common and preferred shares) and/or debt of mid-sized companies. Middle market companies are typically unproven micro and small cap companies that may or may not be publicly traded.
When PennantPark lifted the lid on its fiscal third-quarter operating results for the period ended June 30, it was overseeing an investment portfolio of nearly $1.66 billion. Although it owned an assortment of preferred stock and common stock totaling $208.6 million, the roughly $1.45 billion in debt securities it owns makes it a predominantly debt-oriented BDC.
Because most mid-market companies lack good reputations and access to basic financial services, PennantPark is able to generate market-high returns on its loans. During the quarter ending in June, the weighted average yield on debt was a scorching 12.1%, which is almost triple the return you’d get from a 10-year government bond.
However, the biggest advantage that PennantPark Floating Rate Capital brings can be seen in the name. The entire portfolio of debt securities is based on variable interest rates. With the Fed raising rates at the fastest pace in four decades between March 2022 and July 2023, PennantPark’s weighted average debt yield rose by a spike of 520 basis points from where it stood on September 30, 2021.
Although the country’s central bank has initiated an interest rate easing cycle, a return to a historically low fed funds rate of 0% to 0.25% does not seem likely. With the Fed slowly moving forward with its monetary policy shift, there is plenty of room for PennantPark to generate superior returns from its debt investments.
The steps PennantPark’s management team has taken to protect its client also explain its success. For example, the company’s portfolio, including equities, of roughly $1.66 billion is spread across 151 companies, for an average investment size of $11 million. No bet is too big to turn PennantPark upside down.
Additionally, 99.9% of the company’s debt investments (all but $1.2 million) are first lien. First lien debt holders are at the front of the line for repayment in the event a borrower seeks bankruptcy protection. Despite working with generally unproven companies, as of June 30, only 1.5% of PennantPark’s debt investments were on a non-accrual (i.e. delinquent) basis.
Since going public in 2011, PennantPark Floating Rate Capital has delivered a 187% return to its shareholders, including dividends. While this isn’t close to Wall Street’s prominent tech stocks, it’s a phenomenal return for a monthly dividend payer that can maintain its 11% annual yield.
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*Stock Advisor returns November 11, 2024
Sean Williams has positions in PennantPark Floating Rate Capital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Meet the little-known 11% yielding company that continues to deliver monthly returns for income seekers and makes patient investors significantly richer, originally published by The Motley Fool
