We recently compiled a list of 10 Highest Paying Monthly Dividend Stocks. In this article, we are going to take a look at where Prospect Capital Corporation (NASDAQ:PSEC) stands against the other high paying monthly dividend stocks.
Dividend stocks have consistently been popular with investors, regardless of how often they are distributed. However, when considering the frequency of these payments, it’s clear that companies carefully decide how often to reward their shareholders. While many large companies prefer to issue dividends quarterly for convenience, others provide monthly dividends, which some investors find more appealing. After all, who wouldn’t appreciate a steady stream of passive income each month? Nevertheless, history indicates that companies offering monthly dividends tend to have higher yields but often lack stable dividend policies.
Dividend stocks have consistently played a crucial role in the market’s overall returns. Since 1960, reinvested dividends and the power of compounding have accounted for 85% of the cumulative total return of the market, according to a report by Hartford Funds. The report further mentioned a broader view of these returns and highlighted that from 1940 to 2023, dividend income contributed an average of 34% to the total return of the broader market. The performance of dividend stocks during this period varied depending on market conditions. According to a report by Hartford Funds, during the 1970s—a decade marked by high inflation and sluggish economic growth—dividends accounted for 70% of total returns.
Also read: 10 Extreme Dividend Stocks With Upside Potential.
Among dividend strategies, investors are primarily drawn to high yields because they signify that the stock offers a substantial return through dividends compared to its price. Focusing solely on yield can be misleading. Some companies maintain dividend payments even when their financial health is shaky, while others distribute dividends too aggressively, leaving insufficient profits to reinvest in their operations. A high dividend yield might actually signal a struggling business with a low share price. This is where dividend coverage becomes a crucial measure of a company’s ability to meet its dividend obligations. If that is not in line, the company is likely using past retained earnings to fund current dividends. This situation often precedes a dividend cut, which can severely impact the company’s valuation.
That said, high-yield dividend stocks can still maintain strong dividend policies if their business fundamentals are solid. Many companies with above-average yields have consistently paid and even increased dividends over the years. Research suggests that, over the long term, such stocks often deliver better results. For example, a study by the University of Nevada found that portfolios composed of the top 10 highest dividend yield stocks from the Dow 30 index outperformed those with medium and low dividend yields from 1987 to 2012. The study also noted that investing in high dividend yield stocks can be profitable in the long run, despite potential short-term fluctuations in returns. In view of this, we will analyze the highest-paying monthly dividend stocks in this article.
Our Methodology:
For this list, we looked at stocks that pay monthly dividends. Among them, we chose stocks with the highest dividend yields, which range from 11% to nearly 18% as of August 16. Most of these stocks are from the REIT and capital market sectors. REITs are obligated to distribute about 90% of their income to shareholders, which is good for income investors as it provides them with a reliable and substantial stream of dividends. However, it’s important to note that many of these stocks, despite their high yields, don’t have a consistent history of paying dividends and have experienced dividend reductions or pauses in the past. The stocks are ranked in ascending order of their dividend yields as of August 16.
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Prospect Capital Corporation (NASDAQ:PSEC)
Dividend Yield as of August 16: 14.55%
An American business development company, Prospect Capital Corporation (NASDAQ:PSEC) ranks second on our list of the best dividend stocks. The company invests in debt and equity in US middle market businesses across various industries, aiming to provide consistent and attractive returns to its shareholders. With this focus, the company has allocated 81% of its investment assets to loans secured by a first lien or other senior secured debt, covering 122 portfolio companies across 36 different industries. Since its inception in 2004, Prospect has invested $20.7 billion across 421 investments and has successfully exited 292 of them.
Prospect Capital Corporation (NASDAQ:PSEC)’s current portfolio is valued at $7.9 billion and includes 122 investments. The portfolio generates a 12.1% annualized current yield on performing interest-bearing investments and a 9.7% annualized yield across all investments. Notably, 91% of the company’s total investment income comes from recurring interest income. The middle-market portfolio has an EBITDA of $106 million and is diversified across 36 industries. Additionally, PSEC serves as the sole or lead investor in 77% of its overall portfolio.
Prospect Capital Corporation (NASDAQ:PSEC) has a strong dividend history. The company has paid dividends to shareholders for 84 consecutive months, which makes PSEC one of the best dividend stocks on our list. In addition, since its inception through August 2024, its cumulative payouts amounted to over $4.3 billion. It pays a monthly dividend of $0.06 per share for a dividend yield of 14.55%, as reported on August 16.
Overall PSEC ranks 2nd on our list of the highest paying monthly dividend stocks. While we acknowledge the potential of PSEC as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than PSEC but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.