Now that interest rates have risen to a higher level than we've seen in more than 20 years, conservative institutional investors are pulling money out of dividend-paying stocks and diverting that cash into less volatile instruments. This makes right now a better-than-average time for everyday investors to go shopping for stocks that pay you to hold them.
Whether you're looking for a high yield upfront or a rapidly growing payout, buying these top dividend stocks now could do a lot to boost the passive income you have during your retirement.
Ares Capital Corporation: Ultra-high yield and mild growth
Ares Capital Corporation (ARCC +0.44%) is a business development company (BDC), which means it can avoid paying income taxes by delivering at least 90% of its earnings to investors as a dividend. At recent prices, Ares Capital offers a huge 10.1% yield. It hasn't risen in a straight line, but its payout is up 23% over the past five years.
NASDAQ: ARCC
Key Data Points
This BDC and others like it exist because big banks generally avoid lending to mid-sized companies. Starved for capital, mid-market businesses are generally willing to borrow at higher rates.
Shares of Ares Capital offer an ultra-high dividend yield because the market has concerns about its borrowers' ability to repay debt that got a lot more expensive over the past year and a half. More than two-thirds of this BDC's portfolio earns interest at variable rates. During the year ended June 30, the average yield on its overall portfolio rose from 8.6% to 11.1%.
Ares Capital Corporation doesn't make loans to just any business that comes calling. Among the 473 companies in its portfolio, the average one earns $179.7 million annually before interest, taxes, depreciation, and amortization (EBITDA).
At the end of June, loans representing 1.1% of Ares Capital's total investment portfolio were on non-accrual status, and it looks like the worst effects of increasing interest rates are in the rearview. The non-accrual rate at the end of June was significantly less than the 1.3% rate it reported at the end of March.
While Ares Capital isn't growing its dividend at an exciting pace, it appears capable of maintaining the payout over the long run. If you'd like to begin drawing from your dividend payouts in the near term instead of watching them grow over time, this looks like a smart buy.
American Tower: Lower yield but rapid growth
American Tower (AMT 0.35%) is a real estate investment trust (REIT) that leases data centers and tower space to telecommunications providers all over the world. Despite its name, a majority of its properties are outside the U.S., and they're responsible for 44.7% of total property revenue.
NYSE: AMT
Key Data Points
The stock has been beaten down to prices we haven't seen since 2019, and at the moment it offers a 3.8% dividend yield.
American Tower's payout has more than doubled over the past five years. The stock has been beaten down despite its past performance because investors are concerned about interest rates in general and more specifically, the variable-rate debt it's carrying around. Higher interest expenses were largely responsible for declining funds from operations (FFO), a proxy for earnings used to evaluate REITs, which fell 31.3% year over year in the second quarter.
At the end of June, 14.6% of the company's outstanding debt was collecting interest at floating rates, which is a big improvement from 22.5% at the end of 2022.
Rising interest expenses will likely slow down American Tower's pace of dividend-payout raises, but this is a short-term problem. AT&T, Verizon, and their international peers still need to continually update their networks, and there are only so many tower owners to lease from.
In 2023, American Tower expects $9.70 per share in adjusted FFO, which is more than enough to cover a dividend payout currently set at $6.48 per share annually. We'll probably see some conservative raises for the next couple of years. On a long-term time frame, though, recent interest rate pressure will probably look like a minor speed bump. If you have time to let the payout grow, buying some shares now could lead to heaps of dividend income once you're ready to retire.
