2 Monthly Dividend Stocks to Buy That Haven't Cut Their Payouts in More Than 6 Years

When looking for good dividend stocks that pay out strong levels of passive income, it's often a good idea to look at companies with certain corporate structures.

For instance, real estate investment trusts (REITs) must pay out 90% of their taxable income to shareholders to qualify for no corporate tax, so they often have high dividend yields. Business development corporations (BDCs) must do the same to qualify as regulated investment companies and receive the same tax advantages.

These companies also typically pay dividends monthly. But these policies don't automatically mean these companies will have bulletproof dividends, so investors must still do their due diligence to ensure the dividends are well covered.

Here are two monthly dividend stocks to buy that haven't cut their payouts in more than six years.

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1. AGNC Investment Corp.: 16.3% dividend yield

Amazingly, AGNC Investment Corp. (NASDAQ: AGNC) offers investors a 16.3% yield, which is extremely atypical considering the average S&P 500 stock yields about 1.1%. AGNC is a mortgage REIT, meaning it invests primarily in agency mortgage-backed securities (MBS) guaranteed by the U.S. government.

MBS are securities representing pools of mortgages, and investors are paid from the mortgages' cash flows. Because the mortgages are guaranteed, there is no credit risk for owning them.

However, there is interest rate risk because as rates move, already-issued MBS are either more or less attractive depending on where market rates are set.

Running these companies is difficult because management not only has to try to figure out where interest rates are going, a difficult task as evidenced by this year, but also hedge the balance sheet by adding complex financial instruments such as swaps and futures.

It's also more difficult to evaluate AGNC's dividend than that of other dividend companies because earnings tend to swing wildly due to large unrealized fair value gains and losses in its securities portfolio. Free cash flow also isn't relevant in this situation.

A better way to evaluate AGNC's dividend coverage is to look at net spread and dollar roll income. The metric takes comprehensive income available to shareholders and adjusts for realized and unrealized gains, as well as gains or losses on derivatives and on other hedges on the balance sheet.

During the past year from the end of the third quarter, AGNC has generated net spread and dollar roll income of $1.54 per diluted share and paid dividends of $1.44 per share, so the company has covered the dividend by drawing on its cash reserves.

What could push net spread and dollar roll income lower is a compression of the spread between short- and long-term yields, flattening the yield curve. AGNC's MBSs largely have fixed rates so higher funding costs can tighten the net interest spread on these investments.

Various hedging instruments can cushion the impact of interest rate changes, but it's not the easiest thing to analyze. AGNC hasn't had to cut its dividend since 2020, so dividend investors have done well.

But if you do invest, be aware that a dividend cut is more likely than for most other dividend stocks. Nevertheless, you are rewarded for the risk with a much higher yield.

2. Main Street Capital: 5.94%

Main Street Capital (NYSE: MAIN) is a BDC and essentially falls under the private credit realm.

The company uses a combination of debt and equity to invest in or lend to small and middle-market companies across industries with up to $150 million in revenue. Main Street makes money through interest on its loans, dividends, and gains from its equity stakes it takes in the companies.

Private credit has come under a lot of fire, primarily because of lending to software-as-a-service (SaaS) businesses, which have come under pressure amid perceived threats from artificial intelligence (AI). Main Street, however, runs a very diverse portfolio with limited exposure to internet and software companies.

Most companies Main Street invests in and lends to have held up well. In its preliminary third-quarter earnings results, Main Street said investments on non-accrual status, or past due, accounted for 0.9% of the total portfolio.

A key way to evaluate Main Street's dividend is by looking at distributable net investment income (DNII), which reflects all sources of investment income after subtracting expenses and adjusting for non-cash compensation expense.

DNII has been steady on a quarterly year-over-year basis or when comparing the first six months of this year to the first six months of last year. DNII was $2.05 a share through the first half of the year.

Interestingly, Main Street paid $2.16 in dividends through the first half of the year, but $0.60 of that was in supplemental dividends, which are paid from investment gains and aren't really a part of the core dividend.

So Main Street has healthy payment coverage of its current dividend. Main Street has also increased its net asset value for 17 straight quarters and has not cut its monthly dividend ever since its initial public offering in 2007, so it looks like a much safer dividend yield than AGNC.

Bram Berkowitz 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.