In a climate where many dividend stocks yield modest returns, investors are increasingly looking for alternatives that provide robust income streams. With the S&P 500 yielding around 1.1%, near its historical low, attention is turning to less conventional options that promise higher returns. Three particularly noteworthy stocks have emerged, boasting yields as high as 10.7%.
Ares Capital, a business development company (BDC), currently offers a compelling 9.5% dividend yield. As a registered investment company, Ares is obliged to distribute at least 90% of its taxable income as dividends. Over the past 16 years, it has consistently delivered stable or increasing dividends, a feat not easily achieved in the fickle realm of financial markets. The company focuses on middle-market enterprises, making direct loans and equity investments that generate substantial interest and dividend income, which is essential for upholding its dividend payments. Ares Capital has demonstrated a remarkable investment performance, maintaining an annualized net realized loss rate near 0%, which positions it favorably against its peers and the broader banking sector. With a well-diversified portfolio comprising 587 companies predominantly invested in senior-secured loans, Ares Capital’s strong financial profile supports its ability to increase its income-generating investments and, consequently, dividend stability.
Leading the pack is Starwood Property Trust, a real estate investment trust (REIT) that currently boasts a stunning 10.7% dividend yield. Like Ares, Starwood is also required to payout 90% of its taxable income. Since its initial public offering in 2009, Starwood has never slashed its dividend, maintaining a consistent payout for over a decade. A cornerstone of Starwood’s successful dividend strategy has been its increasing diversification. Originally focused on commercial mortgages, the REIT has expanded into high-quality real estate assets and residential lending. This diversification has not only mitigated risk but also opened new avenues for growth. Recently, Starwood made headlines with a $2.2 billion acquisition of Fundamental Income Properties, adding 467 properties secured by long-term leases with guaranteed rent escalations, reinforcing its stable income foundation.
Western Midstream Partners, operating as a master limited partnership (MLP), rounds out the trio with a distribution yield of 9%. Although the MLP had to reset its distribution level in 2020 due to the pandemic’s impact, it has since rebounded to surpass pre-pandemic payout levels. Focused on energy midstream assets, Western Midstream generates stable cash flow through long-term contracts and regulatory rate structures, translating to reliable distributions for investors. Current growth initiatives include the recent $2 billion acquisition of Aris Water Solutions and the development of new infrastructure, such as the Pathfinder Pipeline and North Loving II gas processing plant. These efforts are expected to foster continued distribution growth at a low-to-mid single-digit annual rate over the long term.
In summary, Ares Capital, Starwood Property Trust, and Western Midstream Partners present compelling investment opportunities for those seeking attractive passive income. With their strong operational foundations and commitments to high dividend payouts, these companies are worth considering for investors looking to enhance their income potential in the current market environment.
