Folks looking for a way to bulk up their passive income stream have lots of options, but many require more capital than the average investors can manage. Luckily, there are some ultra-high-yield dividend stocks that just about anyone can afford.
AGNC Capital (NASDAQ: AGNC) and PennantPark Floating Rate Capital (NYSE: PFLT) offer an average yield of about 12.4% at recent prices. That means an investment of about $4,100 spread evenly among them is more than enough to add $500 annually to your passive income stream.
These two ultra-high-yield dividend payers might not raise their payouts significantly in the years ahead, but there’s a good chance they can maintain their present payouts. Here’s what you should know before adding them to an income-generating portfolio.
1. AGNC Capital
AGNC Capital is a real estate investment trust (REIT) that doesn’t own much real estate. Instead, it invests in mortgage-backed securities (MBS) that tend to pay higher rates of interest than its cost of capital.
At recent prices, the stock offers a 14.1% yield. Stocks generally don’t offer double-digit yields unless investors are worried about a dividend reduction. The mortgage REIT industry can get complicated, but it isn’t hard to see why this company makes folks who rely on steady dividend payments nervous. Since switching from quarterly to monthly dividend payments in 2014, it’s lowered its payout four times.
Many investors began fearing another dividend cut could be around the corner when the company reported a loss of $0.12 per share in the second quarter.
Knowing AGNC’s history, most investors are right to be cautious. For folks with a strong risk tolerance, though, now could be a great time to buy mREIT stocks. The industry has been under pressure since interest rates spiked in 2022, but the Federal Reserve could soon begin lowering interest rates in response to signs of a cooling economy.
Relatively volatile interest rates have raised short-term borrowing costs for AGNC. If these trends reverse as expected, its MBS portfolio will be considered far more valuable than it is today. It’s a long way from guaranteed, but there’s a chance this mREIT can quickly reverse its recent losses and maintain its present dividend commitment for years to come.
2. PennantPark Floating Rate Capital
PennantPark Floating Rate Capital is a business development company (BDC). That means it’s essentially a bank that makes high-interest loans to midsize businesses that can’t get regular banks to return their calls.
Like AGNC, PennantPark Floating Rate Capital makes dividend payments every month. At recent prices, the stock offers a 10.8% yield that is arguably more reliable than any mortgage REIT.
American banks have been increasingly hesitant to lend to midsize businesses for decades. That means well-established BDCs like PennantPark Floating Rate Capital have their pick of the litter when looking for borrowers that reliably generate enough cash to repay their debts.
The average yield PennantPark received from borrowers reached 12.1% in its fiscal second quarter, which ended June 30. This might seem too high for safety but this BDC is focused on producing a steady income stream. Around 87% of its portfolio is first-lien senior secured debt, which is first in line to be repaid if a borrower declares bankruptcy.
With a brief exception in 2018, PennantPark Floating Rate Capital has raised or maintained its dividend payout since it began distributing one in 2011. Thanks to expert underwriting, investors can reasonably look forward to many more years of stability.
As its name implies, this BDC makes portfolio companies borrow at variable rates. Interest rates have been relatively high for a couple of years, but just three portfolio companies representing 1.5% of the total portfolio at cost were on nonaccrual status at the end of June.
The Federal Reserve is widely expected to lower interest rates before the end of the year, which will make it even easier for this BDC’s borrowers to keep up with interest payments. This stock doesn’t offer a yield as high as AGNC Capital’s, but it’s a great option for most income-seeking investors.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Want $500 in Annual Dividend Income? Invest $4,100 in These 2 Ultra-High-Yield Dividend Stocks. was originally published by The Motley Fool
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