High-yield dividend stocks are a major component of my stock portfolio. That's because not only do the right income stocks produce meaningful passive income to reinvest, but they also tend to outperform during market downturns.
Here are three income stocks that have room for solid gains in the next year and even better gains over the long run.
1. Main Street Capital
The blue-chip business development company (BDC) Main Street Capital (MAIN 0.72%) has held up better than the S&P 500 index, which is down 21% so far this year. But the stock has still been pushed down 17% during the same period.
Similar to real estate investment trusts (REITs), BDCs are legally obligated to pay at least 90% of their taxable income to shareholders via dividends. As long as BDCs fulfill this requirement, they don't have to pay corporate taxes. This explains why Main Street Capital yields a market-smashing 6.9%. The stock's dividend growth isn't lacking either: Main Street Capital's monthly dividends per share has soared 95%, from $0.33 paid in the fourth quarter of 2007 to $0.645 declared for the third quarter of this year.
BDCs provide capital to meet the needs of businesses that may otherwise not have access to capital through traditional means, such as bank loans. In exchange for this capital, these small businesses agree to issue ownership stakes or pay above-average interest rates on loans made by BDCs.
And Main Street Capital's investment portfolio focuses on investing in lower- to middle-market businesses. These are defined as companies with annual revenue of between $10 million and $150 million and annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of between $3 million and $20 million. The company's $4.3 billion investment portfolio is split between 190 investments across numerous industries, including machinery, internet software and services, and distribution.
Analysts have an average 12-month share price target of $42.40 for Main Street Capital, about 14% higher than the current $37. And you don't have to take their word for it: Despite stable business fundamentals, the stock's price-to-book-value ratio of 1.4 is moderately lower than its 10-year median of 1.6. This should translate into strong total returns in the years to come.
2. Energy Transfer
With about 120,000 miles of pipelines in its system, Energy Transfer (ET -0.23%) is one of the largest so-called midstream companies. It's estimated that 30% of the U.S.'s natural gas and crude oil is moved on the company's pipelines.
Energy Transfer derives the majority of its adjusted EBITDA from natural gas transportation and storage. Aside from its nearly unparalleled size, what makes Energy Transfer interesting is the promising industry forecast.
The economic viability and lower carbon emissions of natural gas will arguably make it the biggest fossil fuel in the decades ahead. This is why global natural gas demand will moderately grow between now and 2040, which should lead to slow and steady growth for Energy Transfer.
The stock's distribution yield of almost 8% is massive. And with the distribution being covered more than three times over in the first quarter, Energy Transfer looks to be on track to hike its distribution by more than 50%. The average 12-month unit price target of $15.47 would offer investors a 58% gain from the current price of less than $10.
3. WEC Energy Group
With 4.6 million customers in four Midwest states, WEC Energy Group (WEC -1.09%) is a well-established electric and natural gas utility. The company plans to invest $17.7 billion over the next five years to modernize and expand its infrastructure to meet growing customer demand for its services.
The dividend payout ratio is set to be 66.6% in 2022. This makes the stock's 3.2% dividend yield rather safe. Simply put, the company's excess capital after paying its dividend and investment-grade balance sheet should help it to execute on its capital spending plan.
That's why WEC Energy Group anticipates that it will deliver 6% to 7% annual earnings growth over the long term. Thanks to its robust growth potential, analysts have a 12-month average share price target of $106.12. This suggests that WEC Energy Group has 12% upside over the next year.