As interest rates remain near generational lows, more investors are turning to high-yield stocks to generate income from their investment portfolios.

The stocks in the table below were selected for having a high dividend yield and a history of maintaining or growing their dividends over time. The table also notes which stocks pay a monthly dividend, which may be advantageous for income-oriented investors.



Dividend Frequency

Realty Income (NYSE:O)



Golub Capital BDC (NASDAQ:GBDC)



Ares Capital (NASDAQ:ARCC)



TPG Specialty Lending (NYSE:TSLX)



Annaly Capital Management (NYSE:NLY)



High dividend yields from real estate

Let's start first with the real estate investment trusts, Realty Income and Annaly Capital Management. These two REITs are similar in structure only, seeing as they are managed very differently to generate returns for shareholders.

Realty Income is what is known as an equity REIT. It buys and leases primarily single-tenant retail properties to household-name companies like Walgreens Boots, FedEx, and Dollar General. It generally seeks to lease properties for periods spanning more than a decade and focuses on industries insulated from the shift to online retail and economic downturns. Drug stores, convenience stores, and dollar stores make up about 11%, 9%, and 9% of its rental revenue, respectively.

Rather than own and rent physical properties, Annaly Capital purchases mortgages with borrowed money. Its core business is investing in so-called "agency" mortgages, which are backed by guarantees from quasi-government agencies Fannie Mae and Freddie Mac, though it has diversified into commercial real estate and other residential loans.

Mortgage REITs like Annaly Capital carry inherently higher risk than equity REITs like Realty Income, which is reflected in the steep 7 percentage point difference in their dividend yields. The big risk to Annaly Capital is that short-term rates may increase faster than long-term rates, resulting in higher borrowing costs for Annaly that aren't offset by rising yields on its longer-term mortgage portfolio. Realty Income's biggest risk is that its tenants can no longer afford to pay, and that it cannot release its retail portfolio when its leases expire.

Big dividends from business lenders

The three remaining companies are called Business Development Companies (BDCs), which are in the business of lending money to businesses too small for Wall Street that have been deemed too risky for the banking system. As a result, Ares Capital, TPG Specialty Lending, and Golub Capital are able to make high-yielding loans, and ultimately return high dividends to their shareholders.

Ares Capital is without a doubt the leader in the industry. In May 2016, it announced the acquisition of its second-largest competitor, which will allow it to become twice as large as its next-largest peer. Scale has its advantages, as the company played a key role in a $1 billion loan -- the industry's largest-ever transaction -- in June 2016. It also has one of the best and lengthiest records of success, going public in 2004 only to survive and thrive coming out of the financial crisis of 2008-09.

Golub Capital BDC and TPG Specialty Lending are also capable credit investors. Golub Capital BDC is managed by Golub Capital, which shares a leadership position with Ares in making loans to so-called "middle-market" companies that are too small to be served by Wall Street. Golub Capital BDC focuses on lower-risk loans, thus resulting in a substantially lower dividend yield than TPG or Ares. However, its focus on the lowest-risk tranche of loans to the best credits should make it a better performer in downturns.

TPG takes a spot for proving to be a creative lender. The company has managed to generate high returns on its loan portfolio while minimizing losses in the event of default. As an example, TPG Specialty Lending made a loan to now-bankrupt retailer Sports Authority at a whopping 9% interest rate. Given the loan yield, one might expect this loan to go to zero when Sports Authority went belly-up, but TPG Specialty believes it will be repaid in full thanks to a thoughtful approach to managing its risks.

Though BDCs offer high yields, they also carry higher risks. Note that their borrowers are smaller companies that often carry heavy debt burdens, and thus their earnings and resulting dividends will invariably rise and fall with economic growth in the United States. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.