There are lots of ways to build up a passive income stream that can fuel your retirement dreams, but most of them -- like purchasing rental properties -- involve a lot more work than you might be willing to commit to in your golden years. This is why buying high-yield dividend stocks is so strongly recommended.
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These three dividend stocks offer ultra-high yields above 10% right now. An initial investment of $26,500 spread among them is all it takes to build a $3,000-per-year passive income stream.
The payouts these stocks offer aren't guaranteed, but there's a good chance they'll be able to maintain their dividend commitments, and even raise them. Here's why.
1. Medical Properties Trust: a 12.64% yield
Medical Properties Trust (MPW -1.10%) is a real estate investment trust (REIT) that owns hundreds of hospitals and related acute-care facilities spread throughout the U.S. and nine other countries. As a REIT, Medical Properties Trust can avoid paying income taxes by distributing at least 90% of earnings to shareholders as dividends.
Right now, an investment of around $7,920 is all it takes to secure $1,000 in annual dividend income from this stock.
Medical Properties Trust has been able to raise its dividend payout by 45% over the past decade thanks to a hands-off approach. It gets hospital operators to sign long-term net leases that transfer responsibility for variable costs of building ownership (such as maintenance and taxes) to the tenant.
In late 2022 and early 2023, the stock price fell hard, and its dividend yield spiked above 15% in response to news that some of its largest tenants were having trouble making ends meet. Now that some of that risk has been alleviated, the company has a pretty good chance to continue meeting its dividend obligation.
2. Ares Capital: a 10.34% yield
Ares Capital (ARCC 0.73%) is a business development company, or BDC. This is another type of investment vehicle that avoids income taxes by returning most of its profits to shareholders. For about $9,670, you can buy enough shares of this BDC to receive $1,000 in annual dividend income.
Ares Capital's dividend payout hasn't risen in a straight line, but it is up by about 26% over the past five years. Since many of the loans on its books are of the floating rate variety, there's a good chance that it will be able to continue raising the payout in the years ahead.
The company reported a net interest margin that rose 17% year over year to 7.5% in the first quarter. Higher interest rates are making it harder for borrowers to repay their debts, but the BDC has a long-running tendency to lend to companies capable of generating enough cash to pay their bills.
Careful underwriting has kept loans on nonaccrual status down to just 2.3% of the total investment portfolio at amortized cost. If the company can keep this figure low, investors who buy and hold the stock will receive heaps of passive income.
3. PennantPark Floating Rate Capital: an 11.24% yield
PennantPark Floating Rate Capital (PFLT 0.61%) is a BDC that makes dividend payments every month. Right now, $8,900 will buy you enough shares to generate $1,000 in annual dividend income.
As its name implies, nearly all the loans that PennantPark Floating Rate Capital issues come with variable interest rates. This is how it's managed to raise its dividend payout twice already this year.
Rising interest rates on outstanding debt securities could allow it to raise its payout even further in the months to come. In the first quarter, net investment income rose 46% year over year to $16.7 million.
It looks like PennantPark's underwriting skills are even better than Ares Capital's. At the end of March, just four borrowers representing 2% of the total portfolio were on nonaccrual status.
Net interest income recorded during the first quarter worked out to $0.35 per share. This is sufficient to cover a dividend set at $0.1025 per month, and it gives the BDC the ability to raise the dividend payout in line with profits from here on out.
