Are you in a hurry to earn passive income and currently thinking about ultra-high-yield stocks? These three offer more than 10% at the moment.
These stocks' underlying businesses are eager to distribute profits to their shareholders, but that doesn't mean they necessarily want to offer high yields. Generally, dividend stocks don't offer yields above 10% unless the market is concerned they won't be able to maintain their payouts at present levels.
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Here's what you should know about three high-yield dividend stocks that are getting lots of attention.
1. Ares Capital: 10.2% yield
Ares Capital (ARCC -0.05%) is a business development company (BDC) that selectively lends to middle-market companies. As a BDC, it doesn't have to pay income taxes as long as it distributes at least 90% of profits to shareholders as dividends.
Big banks generally ignore mid-sized businesses, even though many are willing to borrow at above-average interest rates. The majority of Ares Capital's loans are issued at floating rates, so the Federal Reserve's hawkish monetary policy has actually improved profitability. The average yield Ares Capital receives from all its investments rose to 10.8% at the end of March from 8.1% a year earlier.
If rates rise too high too fast, many of the businesses Ares has lent to could end up defaulting. At the end of March, loans on nonaccrual status made up 2.3% of total investments compared to 1.7% at the end of 2022. This nonpayment rate is manageable now, but investors will want to keep an eye on this figure in the quarters ahead.
2. PennantPark Floating Rate Capital: 11.4% yield
PennantPark Floating Rate Capital (PFLT 1.15%) is a BDC similar to Ares Capital but with some important differences. First, as its name suggests, the rates on practically all the loans this BDC makes rise and fall with the federal funds rate.
At the end of March, PennantPark received an average yield of 11.8% from its debt instruments. That was a big improvement from the 10% yield on debt instruments it was receiving at the end of last September.
Higher interest rates pushed first-quarter net investment income up 41% year over year. The outstanding performance encouraged the company to raise its dividend payout for the second time this year.
PennantPark's investment income is surging, but four portfolio companies on nonaccrual status represented 2% of the total portfolio on a cost basis at the end of March. Four struggling companies out of 130 in total isn't particularly alarming, but it is twice as many as the company reported six months earlier. This dividend looks relatively reliable now, but investors will want to watch for rapidly rising default rates.
3. Medical Properties Trust: 14.6% yield
Medical Properties Trust (MPW 3.10%) is a real estate investment trust (REIT) specializing in hospitals and related acute-care facilities. Like BDCs, REITs can avoid paying income taxes if they distribute at least 90% of profits to shareholders.
While some REITs manage their properties, this one takes a hands-off approach that includes getting hospital operators to sign long-term net leases. These leases transfer all the variable costs of owning buildings to the tenants so Medical Properties Trust can enjoy ultrareliable cash flows, at least for as long as its tenants can pay their rent.
This stock offers an eye-popping yield now because the market is worried about a handful of struggling tenants. In particular, they're concerned about Prospect Medical Group, an operator that hasn't paid rent at all this year.
In the event that Prospect doesn't pay rent in 2023, Medical Properties Trust still expects funds from operations to come in at $1.50 per share this year. That's more than enough to support a dividend payout currently set at $1.16 annually. Investors will be glad to learn that Prospect recently received $375 million in new financing, which could allow it to catch up on missed rent payments sooner than previously expected.
While we probably don't need to worry too much about the company meeting its dividend obligations in the near term, another pandemic disrupting hospital activity before this REIT's operators return to a solid financial footing could cause the company to slash its dividend payout. At the moment, though, adding some shares of this dividend payer to a diversified portfolio looks like a risk worth taking.
