Are you looking for sources of passive income that can deliver significant cash flows right away? If so, you might be disappointed to learn that the average yield offered by dividend-paying stocks in the benchmark S&P 500 index is just 1.7% at the moment.
Most stocks that pay dividends offer a lower yield than you can receive risk-free from a good savings account, but these three offer eye-popping yields at double-digit percentages. Of course, those high yields won't help you retire comfortably if the companies have to slash their payouts.
These three high-yield stocks stand out because there's a decent chance that they can continue along without reducing their payouts.
1. Ares Capital
Ares Capital (ARCC +0.44%) is the largest business development company (BDC) by market cap. At the moment, its stock offers a juicy 10.9% dividend yield.
NASDAQ: ARCC
Key Data Points
As a BDC, Ares can avoid paying income taxes as long as it returns at least 90% of its profits to shareholders. The stock offers an ultra-high yield because investors are worried about mass defaults amid soaring interest rates.
Ares Capital generally lends to midsized businesses that it feels would warrant debt ratings below investment-grade from the major agencies. Starved for capital, such businesses gladly accept relatively high interest rates.
More than four-fifths of all new investment commitments over the past couple of years have been made at floating rates. This means the returns it receives from existing commitments will rise sharply, as long as there aren't too many defaults.
Ares Capital clearly knows how to select borrowers capable of repaying their high-interest loans. From its initial public offering in 2004 through the end of 2022, exited investments resulted in a 14% internal rate of return.
2. PennantPark Floating Rate Capital
PennantPark Floating Rate Capital (PFLT +0.66%) is another BDC with an eye-popping dividend. At recent prices, it offers an 11.6% yield and the convenience of monthly payouts.
NYSE: PFLT
Key Data Points
Like Ares Capital, PennantPark Floating Rate Capital focuses on middle-market companies with a proven ability to generate cash. PennantPark's capital management strategy goes one step further by limiting investments to businesses that have private-equity sponsors.
Over the past year, the Federal Reserve cranked its target interest rate around 4% higher. All 126 companies in PennantPark's portfolio are experiencing interest rate pressure, but just three were on nonaccrual status at the end of 2022. Moreover, those are minor borrowers that represent just 0.6% of the company's overall portfolio on a fair-value basis.
Despite rapidly rising interest rates, delinquencies actually improved in 2022. At the end of 2021, three companies worth 2.5% of the portfolio were on nonaccrual.
PennantPark recently raised its payout by half a penny to $0.10 per share, and investors could see further payout bumps. The average yield on its debt investments soared to 11.3% at the end of 2022 from just 7.5% a year earlier.
3. Medical Properties Trust
As its name implies, Medical Properties Trust (MPW +2.28%) is a real estate investment trust (REIT). Like BDCs, REITs pay out at least 90% of profits as dividends to avoid paying federal income taxes. At the moment, this REIT offers a mind-blowing 15.2% yield.
NYSE: MPW
Key Data Points
This particular REIT owns 444 hospitals and other acute-care facilities spread throughout 31 U.S. states and nine other countries. It doesn't operate its buildings. Instead, it sits back and collects rent payments from 55 different operators.
Medical Properties Trust gets its operators to sign long-term leases that leave them responsible for all the variable costs of building ownership, such as taxes and maintenance. With annual rent raises sewn into its leases, this REIT enjoys steadily growing cash flows that have allowed it to raise its payout for eight consecutive years.
This REIT offers an unimaginably high yield right now because one of its largest operators wasn't able to make rent payments in January or February. Investors should know that Medical Properties Trust has been able to transition its facilities from underperforming operators to ones that can pay their bills in the past.
If Medical Properties Trust can quickly transition facilities in arrears to new operators, as it's done in the past, investors who buy at recent prices will realize market-beating gains. I bought more shares last week because I know that even if it has to slash its payout this year, I still have a great chance to come out ahead in the long run.
I bought the stock confidently, but it is a small part of a diversified portfolio. Anyone else who buys this stock should probably do the same.
