Have you invested in stocks long enough to remember commissions of more than $10 per trade? How about stock prices quoted in fractions of a dollar instead of the decimal system?
The way everyday folks invest is constantly changing, and we could argue that those changes have accelerated in recent years. One thing that hasn't changed much is that it still takes money to make money.
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Of course, where you put your money makes a big difference. Right now, you could put $43,000 in a federally insured savings account and earn more than $1,800 in annualized interest payments with zero risk.
If you'd like to bump up your passive income stream to $5,000 annually, you could make it happen with the same upfront investment spread evenly among these three high-yield dividend stocks. The returns they offer are by no means guaranteed, but their underlying operations generally produce highly reliable cash flows.
1. Ares Capital
Ares Capital (ARCC +1.65%) is the largest business development company (BDC) with shares that trade publicly. Income-seeking investors like BDC stocks because these investment vehicles can avoid paying income taxes by distributing at least 90% of their earnings to investors as a dividend.
NASDAQ: ARCC
Key Data Points
Ares Capital focuses on middle-market companies with proven cash flows, and this is a game plan that obviously works. This BDC hasn't missed a dividend payment since it went public in 2004, and its quarterly payout has trended upwards since the end of the global financial crisis.
At the moment, Ares Capital shares offer a 10.5% dividend yield. An investment of $16,000 would get you more than one-third of the way to earning $5,000 in annual dividend income.
It looks like investors can expect the company to continue meeting its present obligation for the foreseeable future. As of March 31, the average yield on debt and other income-producing securities in Ares Capital's portfolio worked out to 12% in the first quarter. The company reported Q1 earnings that reached $0.52 per share, which is more than enough to meet a quarterly-dividend commitment set at $0.48 per share.
2. PennantPark Floating Rate Capital
PennantPark Floating Rate Capital (PFLT +2.95%) is another BDC with a double-digit dividend-yield percentage. The stock offers monthly dividend payments at an 11.3% yield; an investment of $12,000 would get you another third of the way toward $5,000 in annual dividend income.
NYSE: PFLT
Key Data Points
PennantPark's history of uninterrupted dividend payments isn't as long as Ares Capital's because it went public in 2011. Since then, the company has doubled its payout, and it could climb much higher thanks to soaring interest rates.
As its name implies, PennantPark Floating Rate Capital relies heavily on variable interest debt. In fact, about 87% of its portfolio at the end of last December consisted of variable-rate investments. The company was receiving an average yield of 11.3% on debt instruments at the end of 2022, which was 13% more than it received just three months earlier.
3. Medical Properties Trust
Medical Properties Trust (MPW +0.58%) is a real estate investment trust (REIT) that specializes in hospitals and related acute care facilities. REITs enjoy tax advantages similar to BDCs, which makes them excellent options for income investors.
NYSE: MPW
Key Data Points
This particular REIT takes a hands-off approach that generally produces reliable cash flows. Instead of running its hospitals, it simply collects rent from 54 operators that lease 444 buildings spread throughout 31 U.S. states and 10 different countries.
Medical Properties Trust gets hospital operators to sign long-term net leases that transfer all the variable costs associated with owning a building to the tenant. This hands-off approach allowed the REIT to raise its dividend payout by 45% over the past decade.
This stock offers a big 13.8% dividend yield at recent prices because investors are worried it could need to reduce its distribution soon. Prospect Medical Holdings, an operator that leases 7.8% of Medical Property Trust's total assets, wasn't able to pay rent in the first quarter.
Medical Properties Trust expects $1.50 per share this year in funds from operations, a proxy for earnings used to evaluate REITs assuming Prospect Medical doesn't pay rent at all this year. This is more than enough to meet its annual dividend commitment, which is currently set at $1.16 per share.
Pandemic-related distancing measures threw a lot of curveballs at hospital operators. With rare exceptions, such as Prospect Medical, all of this REIT's operators kept up with their rent payments.
This company appears capable of maintaining its payout and returning to regular payout raises within a couple of years. That said, it's probably best to make it a small part of a diverse portfolio in case its operators are in worse condition than they seem.
