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Time to Pounce: 2 Ultra-High-Yield Monthly Dividend Stocks Begging to Be Bought in May

One of the best things about investing on Wall Street is there's a strategy that can satisfy everyone. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, pathways exist for investors of varying risk tolerances to grow their wealth over time.

But among these seemingly countless plans of action, buying and holding high-quality dividend stocks is a tough strategy to beat. Recently, the analysts at Hartford Funds, in collaboration with Ned Davis Research, updated their data sets for a lengthy report ("The Power of Dividends: Past, Present, and Future") they issued last year that examined the outperformance of dividend stocks over the long run.

A person holding an assortment of folded cash bills by their fingertips.

Image source: Getty Images.

According to the report's findings, dividend-paying companies delivered an average annual return of 9.17% over a half-century (1973-2023), while being 6% less volatile than the benchmark S&P 500. To add, public companies that initiated and grew their payouts returned an even more impressive 10.19% on an annualized basis over 50 years, with 11% lower volatility than the S&P 500.

On the other side of the coin, publicly traded companies that don't offer a payout trudged their way to a more modest 4.27% annualized return between 1973 and 2023 and did so while being 18% more volatile than the S&P 500.

Companies that regularly pay a dividend are typically profitable, time-tested, and capable of providing transparent long-term growth outlooks to their shareholders. In other words, they're just the type of businesses that are expected to increase in value over an extended timeline.

As we steam ahead into May, two ultra-high-yield monthly dividend stocks, with an average yield of 8.29%, are attractively priced and begging to be bought by opportunistic long-term-minded investors.

Time to pounce: Realty Income (5.75% yield)

The first high-octane dividend stock worth pouncing on in May is none other than the premier name among retail real estate investment trusts (REITs), Realty Income (NYSE: O). The REIT has made 646 consecutive monthly dividend payments to its shareholders and increased its distribution in each of the past 106 quarters. (That's more than 26 years, for those of you keeping score at home.) Suffice it to say, its distribution is incredibly safe.

O Dividends Paid (TTM) Chart

O Dividends Paid (TTM) data by YCharts.

There are two reasons Realty Income's stock has vastly underperformed the S&P 500 since the summer of 2022. The first catalyst is rapidly rising interest rates, which sent Treasury yields through the roof. Income investors have been a bit reluctant to put their money to work in equities when they can nab comparable yields with less risk to their principal from short-term Treasury bills.

The other concern for Realty Income is the health of the U.S. economy. Though the economy is currently expanding, select predictive indicators and money-based metrics suggest a recession may be around the corner. It's not uncommon for retailers to struggle during recessions.

The flip side to this worry is that economic downturns are short-lived. While there have been two expansions that surpassed the 10-year mark, not a single U.S. recession since the end of World War II has endured longer than 18 months. In short, the retail leasing landscape benefits from extended periods of expansion.

What makes Realty Income such a special dividend stock is its vast commercial real estate (CRE) portfolio. Following the closure of its Spirit Realty Capital acquisition in January, it held over 15,450 CRE properties. Here's the kicker: Approximately 89% of the total rent tied to these properties is "resilient to economic downturns and/or isolated from e-commerce pressures," per the company.

Realty Income's strategy is to lease to brand-name businesses that operate stand-alone stores in industries that are going to draw in customers regardless of how well or poorly the U.S. economy and stock market are performing. Examples include leasing to grocery stores, convenience stores, dollar stores, home improvement stores, and drug stores. Collectively, these five industries make up about 40% of Realty Income's annualized contractual rent.

The REIT's leadership team has a lengthy track record of properly vetting its lessees, as well. Whereas the median S&P 500 REIT has enjoyed an occupancy rate of 94.2% since this century began, Realty Income's historic median for occupancy is 400 basis points higher (98.2%) over the same span. We're talking about consistent adjusted funds from operations that simply can't be matched by other retail REITs.

Don't overlook Realty Income's push beyond the retail industry, either. It's closed two deals in the gaming industry over the last two years and forged a joint venture with Digital Realty Trust in November to develop build-to-suit data centers for lease.

Shares of Realty Income can be scooped up by income investors for less than 12 times consensus cash flow in 2025. For context, that's a 32% discount to its average multiple to cash flow over the trailing-five-year period.

Employees using laptops and tablets to analyze business metrics while seated in a conference room.

Image source: Getty Images.

Time to pounce: PennantPark Floating Rate Capital (10.82% yield)

A second ultra-high-yield dividend stock that's begging to be bought in May is off-the-radar business development company (BDC) PennantPark Floating Rate Capital (NYSE: PFLT). PennantPark has been paying a monthly dividend since July 2011, which is mere months after it debuted as a public company. Its monthly distribution of $0.1025 has more than doubled in less than 13 years.

Without getting overly complicated, BDCs are businesses that invest in the debt and/or equity (common and preferred stock) of generally unproven/smaller companies, which are referred to as "middle-market businesses." Although PennantPark Floating Rate Capital closed out 2023 with a little over $180 million in preferred and common equity, the lion's share of its investment portfolio ($1.09 billion) is tied up in debt securities. This makes it a debt-focused BDC.

Though there are advantages and drawbacks to either approach, the undeniable lure of focusing on debt securities is the yield that PennantPark can generate. By focusing on middle-market companies that have limited access to traditional financial services, PennantPark can collect above-market rates on the loans it invests in.

Arguably the biggest selling point for prospective investors is that 100% of the company's debt-securities portfolio has variable rates. Since March 2022, the Fed has undertaken the most aggressive rate-hiking cycle since the early 1980s. In the process, PennantPark's weighted average yield on debt investments has climbed by 510 basis points to 12.5%.

While most investors are counting down the days until the nation's central bank considers lowering its federal funds target rate, PennantPark continues to benefit from this inactivity. As long as shelter inflation remains stubbornly high, the Fed may have no choice but to keep interest rates above 5%. That's excellent news for PennantPark's loan portfolio.

The company's management team also deserves plenty of credit for protecting its principal and maximizing returns. Including common equity positions, its investments were spread across 141 companies, as of Dec. 31. This works out to an average investment size of $9 million. No one investment is critical to PennantPark's success.

To add to the above, only one company was on non-accrual (i.e., delinquent on its payments) as of the end of 2023. This tardy company represents just 0.1% of the cost basis of PennantPark's overall portfolio. In other words, there's been some smart decision-making when it comes to what loans PennantPark holds.

To round things out, all but $0.2 million of the company's $1.09 billion in debt securities are first-lien secured notes. In the event that a borrower seeks bankruptcy protection, first-lien secured debtholders are first in line for repayment. This is another example of management wisely protecting its company's principal.

Valued at roughly 9 times forward-year consensus cash flow, PennantPark Floating Rate Capital looks like a genius buy for patient income seekers.

Should you invest $1,000 in Realty Income right now?

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Sean Williams has positions in PennantPark Floating Rate Capital. The Motley Fool has positions in and recommends Digital Realty Trust and Realty Income. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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