There's no official definition of a high-yield dividend stock. That said, most investors agree that a yield above the S&P 500 index average and the 10-year U.S. Treasury note is an important feature.
With the 10-year note offering a 3.7% yield and the average dividend-paying stock in the S&P 500 offering just 1.6%, these three stocks are way above average.
In addition to a high yield up front, there's a good chance these dividend payers can keep raising their payouts. Here's how buying them now and holding on for the long run could funnel heaps of passive income into your brokerage account.
1. Ares Capital: A 10.05% yield
Ares Capital (ARCC 0.73%) is a business development company, or BDC. These specialized investment vehicles can avoid paying income taxes by distributing at least 90% of their profits to shareholders.
Ares Capital is essentially a lender to midsized companies that have a hard time getting the big banks to return their calls. Middle-market companies are generally willing to pay higher interest rates than their larger peers and accept debt at floating rates.
At the end of March, the average yield on Ares Capital's debt securities rose to 12% at their amortized cost, compared to just 8.9% a year earlier. This BDC's costs of capital are rising too, but not quite as fast. As a result, its net interest margin expanded to 7.5% from 6.4% a year earlier.
Ares Capital's dividend hasn't risen in a straight line, but it has increased by 37% since 2009. With a lending operation that becomes increasingly profitable as interest rates rise, the next 14 years could be even better.
2. Ally Financial: A 4.29% yield
Ally Financial (ALLY 0.41%) is an all-digital bank, but it isn't a risky fintech start-up. Its operation is fueled by $138.5 billion in retail deposits from 2.8 million members.
Investors don't have to worry about uninsured depositors causing Ally Financial to collapse the way some business-focused regional banks did this spring. At the end of March, 91% of its deposits were FDIC insured.
Ally's dividend has doubled over the past five years, and it could soar much further in the years ahead. The bank met its dividend obligation over the past 12 months using just 14.5% of the free cash flow its operations generated.
Ally Financial used to be the financial segment of General Motors, and auto loans are still a big part of its business. Mass defaults caused by a recession are probably the biggest risk with this stock right now.
Retail auto loan charge-offs soared in 2022, but they stabilized in the first three months of 2023. Delinquencies of 30 days or more fell significantly during the first quarter, too. Investors will want to keep an eye on asset quality, but for now, it looks like this bank and its high-yield dividend are going to be just fine.
3. AT&T: A 6.97% yield
Shares of AT&T (T 1.02%) have been especially popular among billionaire investors lately, including Warren Buffett. In these uncertain times, the stability that this telecommunications giant offers is a big attraction.
AT&T cut its dividend in 2022, but it also spun off its unpredictable media assets. Now, investors can look forward to steady growth from 5G and fiber internet subscribers. The first quarter of 2023 was the 13th in a row the company reported more than 200,000 new AT&T Fiber subscribers and the 11th straight quarter where it added more than 400,000 new phone subscribers.
AT&T shares offer a high yield up front and a chance for significant payout raises over the next few years. The company expects $16 billion or more in free cash flow in 2023 and will only need about half of this sum to meet its current dividend commitment.
Unlike the streaming services it no longer controls, phone and internet subscribers tend to stick around a long time. This should make steady dividend raises in the years ahead a breeze.
