Investors look to dividend stocks for one reason -- they want a reliable stream of income. Dividend stocks can be great for retirees or other income investors because they provide cash consistently.
Investors have two choices for dividend stocks: High-yield dividend stocks with higher risk or more reliable dividend stocks that consistently increase payouts. Owl Rock Capital Corporation (OBDC -0.20%), Morgan Stanley (MS 0.42%), and Travelers (TRV -0.95%) are all dividend stocks that range from riskier high-yield stocks to reliable dividend payers.
1. Owl Rock Capital Corporation
Owl Rock Capital delivers a stellar yield of 8.5%, but there are a few things investors should know about this high-yielding stock. Owl Rock Capital provides loans to middle-market companies and is known as a business development corporation (BDC). A BDC is simply a company that makes loans or buys equity in private businesses in the United States. These companies can help provide funding to companies that banks may consider to be too risky.
BDCs have similar tax rules to real estate investment trusts (REITs), requiring them to pay out 90% of income in the form of dividends. For this reason, BDCs offer higher dividend yields but can be riskier investments.
Owl Rock Capital makes loans to middle-market companies, or companies with earnings before interest, taxation, depreciation, and amortization (EBITDA) of $10 million and $250 million and annual revenue of $50 million to $2.5 billion. The company believes this space is underserved since large institutional investors are subject to more stringent liquidity requirements. As a result, these large institutions lend to large companies, leaving a hole in funding for smaller companies.
This focus on middle-market companies has paid off, with Owl Rock Capital seeing investment income of $740 million, up 27.1% from 2020 and up 43.4% from 2019. Another key metric for BDCs, called net asset value per share (NAV), came in at $14.95, up nearly 2% from the same quarter last year. Growth in NAV is one way to tell if you are investing in a solid management team that creates long-term value. While the company's NAV dipped in 2020 due to low interest rates amid the pandemic, it has trended in the right direction over the past year.
Owl Rock Capital's high yield is attractive. Still, investors should be aware of the risks of potential defaults if the broader economy were to struggle. Because the company invests in middle-market companies, these could be the first to feel the pain from an economic downturn.
Investors should also keep an eye on rising interest rates, which could affect its portfolio companies' repayments of those loans. Rising rates could also make the stock look less attractive if its dividend yield doesn't increase alongside interest rates. However, given the current strength of the economic recovery and lending markets, Owl Rock Capital looks to be a solid high-yield dividend stock worth the risk.
2. Morgan Stanley
Morgan Stanley is another solid dividend stock, yielding investors nearly 2.7%. This dividend had doubled when it announced its quarterly dividend in June, which is a testament to the company's strong financial position.
Morgan Stanley is known chiefly for its investment banking services, which have been stellar this year. Through the first nine months of 2021, its investment banking revenue increased 61%, thanks to a solid backdrop for mergers and acquisitions (M&A) and initial public offering (IPO) activity.
While its investment bank saw solid performance, what excites me most about the firm is how it can grow in various market conditions. Last year the company focused on diversifying its revenue streams by acquiring E*Trade and Eaton Vance. By adding the E*Trade platform, Morgan Stanley added a stream of commissions and fees income that can do well with increased market volatility, which tends to increase trading.
Adding Eaton Vance boosted the firm's asset management segment, providing it with a steady stream of asset management fees to stabilize its revenue. Through nine months this year, the firm's commissions and fees increased 20%, while its asset management revenue increased 41% from last year.
One key metric to watch for dividend stocks is the payout ratio. This ratio can give you an idea of how sustainable a dividend is. Generally, you want to see a company with a payout ratio of 50% or less. Morgan Stanley's payout ratio is around 15%, which gives investors confidence that the firm can continue to maintain and grow its dividend. Thanks to its diverse business model, Morgan Stanley is positioned well to succeed and is deserving of a spot in any dividend investor's portfolio.
Travelers is a solid dividend stock that yields 2.2% and has shown a commitment to raising dividends -- which it has done for 17 consecutive years. Travelers is a property and casualty insurance company that provides several coverage options -- including auto insurance, workers compensation, and property coverage to individuals, businesses, and governments. According to S&P Global Market Intelligence, Travelers was the leading commercial insurance writer in the U.S. in 2020, and it is the only commercial insurer with a top-five position across five major product lines, showing its range of products.
Growth this year has been solid for Travelers and can partly be attributed to the backdrop for insurers. Insurance companies have seen more significant claims due to increased catastrophe losses from extreme weather events and other events in the past few years. As a result, insurers must respond by raising premiums, creating a favorable environment for premium growth. Travelers has seen premiums grow 5.9% through the first nine months of 2021 compared with last year. In the third quarter, its policies in force related to auto and homeowners insurance coverage increased to a record level.
Along with solid top-line growth, you want to see insurers maintain good profitability on policies they underwrite. One metric insurance companies use is the combined ratio, where a ratio under 100% indicates that the company is underwriting profitable policies. Travelers has posted a combined ratio of 97% through the first nine months of this year, and in the past 15 years, Travelers has only seen its combined ratio cross 100% once in 2011.
Travelers' consistency in profitable underwriting is a huge reason the company has increased its dividend payout for 17 years in a row. That, coupled with its payout ratio of 24%, has Travelers positioned to continue making and increasing its dividend payout, making it another stellar dividend stock for income investors.