Is It Time to Load Up on These 3 Ultra-High-Yielding Dividend Stocks? (1 Yields 11%!)
Key Points
Ares Capital has paid a stable or growing dividend for over 16 years.
Energy Transfer aims to increase its distribution by 3% to 5% each year.
Starwood Property has delivered over a decade of dividend stability.
- 10 stocks we like better than Ares Capital ›
The average dividend yield is rather low these days. We see this in the S&P 500's dividend yield, which is around 1.2% and near the all-time low.
However, not all stocks offer unappealing dividends. Here are three companies with monster yields that income-seeking investors might want to load up on right now.
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Ares Capital
Ares Capital (NASDAQ: ARCC) currently yields 10.7%. The business development company (BDC) has a rock-solid record of paying dividends. It has paid a stable or growing dividend for over 16 years. That's impressive, considering that several other BDCs have had trouble maintaining their dividends over the years.
One of the keys to Ares' success is its scale. It's the largest publicly traded BDC, with a $29.5 billion investment portfolio across 600 companies. It primarily provides direct loans and other investments to private middle market companies ($100 million to $1 billion of annual revenue). Ares mainly invests in senior secured loans, giving it the highest priority for repayment should the borrower file for bankruptcy. Its strong underwriting has led to minimal loan losses over the years.
Ares Capital currently generates earnings in excess of its dividend and has built up a cushion of undistributed income. That puts its payout on a firm foundation. Ares also has strong liquidity, enabling it to continue growing its loan portfolio. With its stock price currently down more than 20% from its 52-week high, now looks like a great time to load up on the high-quality, high-yielding BDC.
Energy Transfer
Energy Transfer's (NYSE: ET) distribution currently yields 6.9%. The master limited partnership (MLP) -- an entity that sends a Schedule K-1 Federal tax form each year -- has increased its payout every quarter since the end of 2021. It aims to raise its distribution by 3% to 5% per year.
The MLP generates substantial stable cash flow, as fee-based sources account for 90% of its annual earnings. Energy Transfer produced enough cash to cover its high-yielding distribution by a comfortable 1.8 times last year. That enabled it to retain billions of dollars to reinvest in the partnership.
Energy Transfer expects to invest at least $5 billion into growth capital projects this year. It has expansions lined up through 2030. That should give the MLP plenty of fuel to continue growing its high-yielding payout. Its compelling combination of income and growth makes it a terrific passive income investment right now, especially since higher oil prices should boost its non-fee-based earnings.
Starwood Property Trust
Starwood Property Trust (NYSE: STWD) has the highest yield in this group at 11%. The real estate investment trust (REIT) has been a model of dividend stability over the years. It has paid a stable dividend for over a decade.
One of the keys to Starwood's income stability is its increasing diversification. The leading commercial mortgage REIT has expanded from investing in mortgages backed by commercial real estate to also invest in residential and infrastructure loans, as well as directly in properties. For example, Starwood acquired net lease platform Fundamental Income Properties for $2.2 billion last year. It owns a portfolio of properties secured by long-term net leases (a 17-year weighted-average lease term and 2.2% average annual rental escalations). It will provide the REIT with a stable, growing source of income to support its dividend.
Starwood expects its investments, such as Fundamental Income and others across its diversified portfolio, to boost its earnings in the future. That should enhance its ability to pay dividends while growing shareholder value. With its stock price currently down more than 15% from its 52-week high, driving up its dividend yield, now's a great time for income investors to load up on Starwood.
Big-time income investments
Ares Capital, Energy Transfer, and Starwood Property currently offer ultra-high-yielding income streams. They have solid records of delivering stable to growing dividends, which seems likely to continue. That makes them look like ideal income stocks to buy right now.
Should you buy stock in Ares Capital right now?
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Matt DiLallo has positions in Ares Capital, Energy Transfer, and Starwood Property Trust. The Motley Fool has positions in and recommends Ares Capital and Starwood Property Trust. The Motley Fool has a disclosure policy.
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