Over the long term, Wall Street has been nothing short of a wealth-building machine. While the stock market has its ups and downs, so do stocks useful has outperformed other asset classes over the past century, including government bonds, housing, oil and gold.
But not all stocks are created equal. While artificial intelligence (AI) stocks and the ‘Magnificent Seven’ have taken most of the credit for pushing the major indexes to new highs in 2024, dividend stocks have been Wall Street’s fuel source for the past half-century.
Dividend stocks are the unsung hero of Wall Street
In 2023, the investment advisors at Hartford Funds released a comprehensive report examining the ins and outs of what makes dividend stocks so great. Specifically, “The Power of Dividends: Past, Present, and Future” compared the performance of dividend-paying companies with that of non-paying companies over a 50-year period (1973-2023).
The report shows that dividend stocks more than doubled the average annual return of non-paying companies (9.17% versus 4.27%). Moreover, this outperformance was achieved with dividend shares of 6% fewer more volatile than the benchmark S&P500. By comparison, non-paying companies were found to be 18% more volatile than the widely followed S&P 500.
The Hartford Funds’ findings shouldn’t be too shocking. Companies that are profitable on a recurring basis, have proven they can weather economic downturns and are able to provide transparent long-term growth prospects are exactly the types of companies that investors expect to grow in value over the long term.
Including exchange traded funds (ETFs), there are over 1,000 securities from which investors can choose that offer their shareholders/unit owners a dividend.
Although income seekers want the highest possible returns with the least possible risk, finding this dynamic is not easy. In fact, studies have shown that the higher the returns (over 4%), the riskier the investment becomes. This is why stocks with double-digit returns are sometimes more trouble than they’re worth.
But this is not always the case.
A little-known, small-cap, ultra-high-yield dividend stock – currently yielding 11% – that pays out his payout monthly, perhaps the safest double-digit stocks in the world. Investors, say hello to the business development company (BDC) PennantPark Capital with variable interest (NYSE:PFLT).
Meet the safest monthly dividend stocks with an 11% yield in the world
BDCs are companies that invest in the equity (common or preferred stock) and/or debt of “middle market” companies. Think of mid-market companies as micro-cap or small-cap companies that are generally unproven.
Although PennantPark held $192.8 million in various preferred and common stock as of end-March 2024, the majority of its investment portfolio ($1.285 billion) is tied up in debt securities. This makes PennantPark Floating Rate Capital a debt-focused BDC.
As a PennantPark shareholder, I’m biased, but not unaware of the risks faced by small BDCs. For example, the company is dependent on a strong US economy to ensure that outstanding loans are repaid. If the US economy were to enter a recession, which the historical decline in the US M2 money supply predicts will happen, this could lead to an increase in non-accruals (i.e. delinquencies) for companies in the Mid section.
But even with these visible risks, PennantPark has consistently demonstrated the rock-solid foundation on which it is built.
For starters, focusing on debt as opposed to equities has its advantages. Because mid-market companies often have limited financial solutions, the loans PennantPark holds can generate market-high returns. At the end of March, the weighted average return on debt investments was 12.3%. For those of you keeping score at home, this is more than double the roughly mid-5% yields associated with short-term government bonds.
What really appeals to this small-cap, supercharged income stock (which may be given away by the name) is that the entire debt portfolio has variable interest rates. Every time the Federal Reserve raises or lowers interest rates, it has a direct impact on the returns PennantPark generates from its outstanding loans.
Since March 2022, the country’s central bank has undergone its most aggressive rate hike cycle in four decades. As a result, PennantPark’s weighted average return on debt investments has increased by 490 basis points to 12.3% since September 30, 2021. As long as shelter inflation remains stubbornly high, the Fed will be in no hurry to initiate a rate easing cycle. This stalemate lines PennantPark’s pockets.
Despite being unproven businesses, PennantPark had only one business on a non-accrual basis as of March 31. This one delinquency represents just 0.4% of the company’s total portfolio ($1.48 billion) on a cost basis and is a testament to the company’s stellar performance. control process in place.
This is a good time to point out that PennantPark Floating Rate Capital’s management team has also taken deliberate steps to protect the client. For example, its $1.48 billion portfolio, including stock positions, is invested in 146 companies. With an average investment size of just $10.1 million, no investment is big enough to capsize the portfolio.
In addition, 99.98% of the company’s $1.285 billion debt securities portfolio is held in secured first lien loans. Debt holders with a first lien are first in line for repayment in the event a borrower seeks bankruptcy protection.
The final piece of the puzzle is that PennantPark is trading at 2% below its book value. BDCs that generate stable interest income in an environment where the Fed’s monetary policy is incredibly transparent should not trade below their book value.
While the price increase is likely to be modest, you’d be hard-pressed at best to find a safer double-digit stock right now than PennantPark Floating Rate Capital.
Should you invest $1,000 in PennantPark Floating Rate Capital now?
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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.
This little-known small-cap company could be the world’s safest dividend stock with 11% yield, originally published by The Motley Fool
