This little-known supercharged income stock doles out a payment to its shareholders on a monthly basis.
One of the great things about putting your money to work on Wall Street is there’s more than one way to generate a profit. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, every investor is likely to find one or more securities that’ll help them meet their goals.
But among the countless ways to build wealth on Wall Street, buying and holding dividend stocks has historically been one of the most successful investment strategies.
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Dividend stocks reign supreme
Companies that pay a regular dividend to their shareholders are almost always profitable on a recurring basis, as well as time-tested. Additionally, most income stocks can provide transparent long-term growth forecasts.
But what’s most important to investors is that dividend stocks have crushed non-payers in the return column over the last half-century. In The Power of Dividends: Past, Present, and Future, the researchers at Hartford Funds compared the performance of dividend stocks to non-payers between 1973 and 2023. While non-payers averaged a modest 4.27% annual return and were 18% more volatile than the benchmark S&P 500, income stocks delivered an average annual return of 9.17% and were 6% less volatile than the broad-based index.
The challenge for investors is maximizing yield while minimizing risk. Unfortunately, studies have shown that risk and yield tend to go hand in hand, so ultra-high-yield dividend stocks can sometimes be more trouble than they’re worth. But this isn’t always the case.
As we prepare to steam ahead into 2025, one completely off-the-radar high-octane dividend stock, which is currently doling out an 11.5% annual yield, might be the safest way for investors to generate a double-digit yield in the new year.
This may be Wall Street’s safest 11%-plus-yielding stock for 2025
Though there are well over 100 publicly traded companies currently yielding north of 10% on an annual basis, the one that could allow income seekers to sleep easy at night is little-known business development company (BDC) PennantPark Floating Rate Capital (PFLT -0.28%).
BDCs are a type of business that invests in the equity (common and preferred stock) and/or debt of middle-market companies. By “middle-market,” I’m referring to generally smaller, unproven companies.
As you can imagine, there’s some risk that comes with investing in companies that haven’t yet proved themselves. Businesses that lack a track record of profits or haven’t yet shown they’re time-tested run the risk of defaulting on their loans or losing value if they’re publicly traded. But there are upsides, too, as you’re about to see.
Through Sept. 30, PennantPark held nearly $1.984 billion in assets. This was comprised of $234.1 million in various common- and preferred-stock equity and roughly $1.75 billion in debt securities. This makes PennantPark a primarily debt-driven BDC.
Since a considerable percentage of middle-market companies are unproven, they may lack access to basic financial services, including traditional credit and lending channels through financial institutions. As a result, PennantPark is able to lock in loans with capital-needy businesses at rates that are well above the market average. Whereas the U.S. 10-year Treasury yield is hovering around 4.5% at the moment, PennantPark’s weighted-average yield on debt investments totaled 11.5%, as of Sept. 30.
But this high yield on debt investments is only part of the story. The reason PennantPark Floating Rate Capital’s weighted average yield on debt investments is so high is because 100% of its loans are variable rate.
The Federal Reserve’s steepest rate-hiking cycle in four decades — 525 basis points between March 2022 and July 2023 — sent its weighted-average yield on debt investments from 7.4% on Sept. 30, 2021 to as high as 12.6%. With Fed Chairman Jerome Powell forecasting only two rate cuts in 2025, PennantPark is ideally positioned to continue reaping the rewards of higher interest rates.
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In addition to monetary policy working in its favor, PennantPark’s management team has done a phenomenal job of protecting the company’s principal.
For example, if you include the $234.1 million the company holds in common and preferred equity, PennantPark’s $1.984 billion portfolio is spread across 158 investments. This works out to an average investment size of $12.6 million. No single investment is vital to the company’s success, nor capable of upending the proverbial ship if something goes wrong.
To build on this point, all but $2.7 million out of the company’s $1.75 billion debt portfolio is first-lien secured. In the event that one of PennantPark’s borrowers seeks bankruptcy protection, first-lien secured debtholders are first in line for repayment. Though delinquencies haven’t been much of an issue — just a 0.4% non-accrual rate, relative to the overall portfolio cost, as of Sept. 30 — it’s worth noting that the company has repayment priority.
The final trait investors are sure to appreciate is that PennantPark Floating Rate Capital doles out its dividend on a monthly basis. While payout increases aren’t too common, the board did modestly boost the monthly dividend twice in 2023 following the Fed’s aggressive rate hikes. This payout, which currently amounts to an 11.5% annual yield, seems to be incredibly safe and should more than double up U.S. Treasury yields.
