One of the easiest ways to generate passive income is by investing in companies that pay dividends. These stocks can be an excellent source of income and help increase your wealth, especially over the long term.

Not all dividend stocks are the same. Some have modest yields of 2% to 3%, and can be a reliable source of income. Others generate high yields and can deliver big payouts, but there may be tradeoffs.

Three companies with yields of 9% or more are Blackstone Secured Lending Fund (BXSL), Owl Rock Capital (OBDC -0.88%), and Ares Capital (ARCC -0.75%). However, these ultra-high yields come with added risks. Read on to see how much you can make by investing $1,000 in these stocks -- and if the rewards outweigh the potential risks.

Blackstone Secured Lending Fund takes over where banks left off

The Blackstone Secured Lending Fund pays out a fat dividend yielding investors 10.9% annually. Its dividend yield is so high because of its business structure and the hole it fills in lending markets.

It operates as a business development corporation (BDC), meaning it must follow specific requirements under the law. One of those requirements is that it must pay out 90% of its taxable income through dividends. Another requirement is that 70% of its investments must be in U.S. private companies or thinly traded public companies.

The Blackstone Secured Lending Fund sees an opportunity to lend to these companies because of the market hole left after the Great Recession in 2008. After the financial crisis, banks pulled back heavily from lending to these kinds of private or thinly traded companies. According to S&P Capital IQ LCD, banks used to have a 33% share of the senior secured loan market in 1995. Through 2021, banks have just an 8% share of this market. Bank consolidations have also caused a supply shortage for private lending.

This BDC is a subsidiary of Blackstone, the big alternative asset manager, and it leverages its platform to identify profitable lending opportunities. It doesn't lend to distressed companies, and 98% of its portfolio is in senior secured loans, meaning it has the first claim on a company's assets if it files for bankruptcy. 

Also, nearly 100% of its loans are floating rates, so it benefits when interest rates increase as they have this last year. Last year its total investment income was $850 million, a 36% increase from the year before. 

Owl Rock Capital looks to fill a funding gap for middle-market companies

Owl Rock Capital is another BDC that focuses on lending to middle-market companies. These are companies with earnings before interest, taxes, depreciation, and amortization (EBITDA) of $10 million to $250 million and annual revenue of $50 million to $2.5 billion.

Like the Blackstone Secured Lending Fund, Owl Rock Capital sees a significant opportunity to lend to these companies that banks have neglected. The drawback to investing in middle-market companies is that these loans are not very liquid, meaning if Owl Rock Capital needs to offload this debt in a crunch, it may have difficulty finding buyers.

It has more than $13 billion in investments; 72% of its loans are first-lien debt, and 95% of its new debt investments have floating rates. It also got a boost from rising interest rates, which increased its total portfolio yield from 7.7% to 11% last year, while its total investment income jumped 18% to $1.2 billion. Owl Rock Capital has a dividend yield of 9.8%.

Ares Capital is similar to the two corporations above, with extra risk

Ares Capital is the largest publicly traded BDC and U.S. direct lender with a $21.8 billion investment portfolio. It also invests in middle-market companies primarily, taking advantage of the funding gap left by banks.

Ares Capital takes on riskier loans: Only 44% are first-lien loans, much less than Blackstone Secured Lending Fund and Owl Rock Capital. To mitigate this risk, it spreads its loans across industries and businesses. Last year its investment portfolio yield was 10.6%, up from 7.9% in the prior year, and its total investment income grew 15% to $2.1 billion. Ares Capital Corporation has a dividend yield of 10%.

Here's how much you can make this year. Is the risk worth it?

If you invest $1,000 across these three BDCs, you could expect to collect about $102 in dividend income this year based on their current dividend payouts. However, these dividends aren't set in stone and can fluctuate based on the current market conditions.

While BDCs benefit from rising rates, especially those holding floating-rate loans, higher rates could become a pain point for its borrowers. If rates continue increasing, borrowers face an ever-increasing cost of capital to pay down their debt. This could hurt the borrowers' credit quality and ability to repay their debt. If borrowers cannot pay debts and default, the cash flows of these BDCs will decrease, hitting their stock prices and dividend payments.

Lending markets face near-term headwinds. Ares Capital discussed in its earnings report that this is a risk-off environment with deep uncertainty. Inflation, tightening financial conditions, and a potential recession could all reduce demand for credit. While these BDCs attempt to hedge these risks by diversifying, a wave of defaults would wreak havoc on their businesses.

There is no telling what will happen in the economy in the next six months, but as an investor, it's important to know potential risks before jumping into an investment. If you're OK with these near-term risks, these high-yielding dividend stocks could be a solid source of passive income as part of your balanced investment portfolio.